Serviceable Market: How to Calculate Your SOM (2024)

As an entrepreneur, finding a place in a new or existing market is likely one of the first steps you will take to start a new business or expand. You may have an exciting dream about a product or service, but if there is no demand or opportunity, you face an uphill battle to turn your business idea into a success.

So how can you identify the opportunities in your market? A metric called Serviceable Available Market (SOM) can provide valuable insights into market size and share. Learn what factors influence SOM and how to calculate it for your own company.

What is a viable market?

The Serviceable Available Market (SOM) reflects the estimated share of a market that your company can realistically serve based on its offerings, the overall market size, and the competitive landscape.

If you are an eCommerce brand, you can gain a more realistic idea of ​​your expected market share by using SOM as the basis for your market research and overall business strategy. SOM can help you evaluate the potential sales of a particular product or service and identify opportunities for targeted sales tactics and marketing strategies.

TAM vs. SAM vs. SOM: What’s the difference?

SOM is a realistic look at your company’s market and the final level of market size analysis. Here’s a breakdown of other key market size metrics and how they relate:

• Total Addressable Market (TAM). TAM represents the overall market demand and revenue potential for your company’s product or service category.

• Serviceable Addressable Market (SAM). SAM is a segment of TAM that takes into account your company’s geographic reach and distribution capabilities.

• Serviceable Available Market (SOM). SOM is a SAM segment that captures the realistic market share for your specific offerings, taking into account your historical business performance, brand awareness and competition.

TAM, SAM and SOM are three metrics that represent different levels of market segmentation. TAM is the most comprehensive look at what a company could earn from 100% of a given market. This is an unattainable, high-level view that is divorced from market reality because it represents what a global monopoly on an industry would look like.

Drilling down on SAM and SOM gives you a more specific picture of the market segment that you can realistically capture.

Factors affecting SOM

Four main factors influence SOM and separate it from TAM and SAM:

Market size and reach

SOM filters the TAM based on your company’s target market and potential market reach. Market reach is the number of potential customers you can effectively reach with your available resources and skills. Conduct market research to determine the total size of your specific market, what percentage of that market is available, and how effectively you can reach that percentage of customers.

For example, a Texas e-commerce retailer of sustainable cleaning products might use market reports to determine that the global home cleaning products market is approximately $38.4 billion in 2023. From there, he could determine what percentage of that market is available in his region – and how many target customers are included in that percentage?

product

Your product and its quality, price and uniqueness have a significant impact on SOM. What is the total market demand for the particular product you want to sell? How many customers can and want to buy your product at the set price? What is the viability of your product – how relevant and interesting is your product to meeting the needs of your ideal buyer persona? A high-quality product in a new market can appeal to a larger audience and lead to greater SOM.

Competition

The number and strength of competitors in your particular market have a major impact on SOM. Do you offer a superior product to other companies? How does your pricing strategy compare to your competitors? What is your competitive advantage in the market? How many companies are there in your product category? Are your sales strategies aligned with your market? A highly competitive market may reduce your SOM, but a compelling unique value proposition (MSRP) may be enough to differentiate your product.

Historical performance and external research

SOM takes into account your company’s past performance. Use key business metrics such as net income, current assets and operating cash flow to understand your performance and estimate your revenue.

Quantitative data like sales analysis and qualitative data like surveys of your customer base can help determine your company’s brand equity – the perceived value of your company.

For startups and newer companies without a performance history, conduct external research on market trends in your geographic location to estimate average annual revenue.

How to calculate SOM

To calculate SOM, multiply your previous year’s market share percentage by the current year’s SAM. Here is the formula:

Last year’s market share % x this year’s SAM = SOM

To calculate your market share last year, divide last year’s sales by last year’s SAM.

Calculate SAM by multiplying your total potential customers in your market by the average annual revenue per customer, also known as annual contract value (ACV).

Suppose a cosmetics e-commerce company identifies its SAM at $100 million based on market reach and understanding of its geographic location. The company had $3 million in sales last year, so it can calculate its market share as follows:

$3 million in sales last year / $100 million SAM last year = 0.03% market share last year

The company learns that this year’s SAM increased to $140 million due to market expansion and an increased number of retail locations in new territories. The cosmetic company could then calculate its current SOM:

0.03% market share x $140 million SAM = $4.2 million SOM