This article is Part 3 in a series. See Part 1 for an overview of your Total Addressable Market and Part 2 for how to calculate your Serviceable Available Market (SAM)
When you’ve calculated your total addressable market (TAM) and serviceable available market (SAM), it’s time to focus on your Serviceable Obtainable Market (SOM).
Your startup’s Serviceable Obtainable Market is the third and final piece in the revenue-projection puzzle.
Calculating SAM applies realistic limitations to your TAM calculations.
SOM is about refining the available market and setting ambitious targets to position your startup as attractive to investors, while acknowledging what is achievable with the resources at your disposal.
It’s a delicate balancing act to get right, and might require measuring a quarter or two of sales and marketing outputs against your targets.
Check out our articles on calculating your Total Addressable Market (TAM) and Serviceable Available Market (SAM) for a refresher.
What Is a Serviceable Obtainable Market?
A serviceable obtainable market (SOM) is the percentage of the addressable and achievable market segment that you can realistically convince to buy your product or service.
It’s impossible to capture 100% of any market, regardless of the product or service. Not every potential customer is a good fit. SAM narrows the focus — from a wildly unachievable 100% to a realistic objective.
A SOM calculation takes this one step further, refining growth goals into annual and quarterly targets.
These targets are based on the percentage of the market you can reach with the time and resources available to you.
Ultimately, this comes down to the amount of runway you have and the budget you allocate to sales and marketing activities.
What influences SOM calculations?
Revenue-generating activities require a decent budget to achieve successful outcomes.
However, these activities compete with other demands on your company’s budget and cashflow; product development and customer services/support are two examples.
This means you need to focus on the percentage of the market you can reach with the resources and time available to you.
Plus, not every customer is right for your company, product or service.
Some prospects don’t need it, don’t want it, can’t afford it, or simply don’t understand why they should spend money on something they’ve managed without for years.
Your SOM calculation should contain everything you’ve learned from achieving product-market fit (PMF) and understanding your ideal customer profiles (ICPs).
The amount your average customer pays annually (customer lifetime value) and the amount of monthly and annual revenue your company generates directly impact SOM calculations.
In many ways, a SOM calculation is a moving target; you can refine and adjust it. As you reach more customers, your revenue increases and your runway extends. If customers churn, your revenue goes down — having the opposite effect.
Several factors have a noticeable impact on SOM calculations. New funding will boost your cashflow and extend your runway, allowing your sales and marketing team to target a larger share of the available and achievable market.
New products and services can have the same positive impact. Entering new markets — geographic areas, sectors, demographics — gives you more prospects to target.
Let’s dive into the benefits of calculating SOM and how to determine this key growth metric.
What are the benefits of calculating your serviceable obtainable market?
A SOM calculation creates a precise understanding of how you will achieve your annual and quarterly targets.
Start with your annual revenue target, then work backward, breaking this down into quarterly sales targets.
Using the results of those calculations, a founder can divide the figures further to set monthly revenue targets.
With these figures, you can accurately estimate:
- The number of marketing qualified leads (MQLs) and sales qualified leads (SQLs) you need in the pipeline every quarter.
- The percentage of SQLs you need to convert.
- The budget you can allocate to sales and marketing activities to accurately calculate your Customer Acquisition Costs (CAC).
- The minimum annual and customer lifetime value (CLTV) you require to make a profit.
- How quickly you will achieve profitability, given the amount of runway available, burn rate, and current monthly recurring revenue (MRR).
Now, you can include this information in specific sales and marketing strategies, actionable plans, and key performance indicators (KPIs) for those teams.
How to calculate your business’s serviceable obtainable market
To determine SOM, we need to use the SAM figures and calculations as our starting point:
TAM Target Segment X Annual Contract Value = SAM
In the example from our TAM calculation article, this resulted in the following output:
50% X $25,000,000 = $12,500,000 (SAM)
Calculate your serviceable obtainable market like this:
- Divide last year’s total revenue by last year’s SAM figure — giving you a market share figure for the previous year
- Multiply last year’s market share by this year’s SAM figure.
Let’s see how this looks in practice using our fictional startup (a SaaS that provides software to mid and enterprise-level accountancy firms in the US):
Last year’s revenue: $2.5 million X $12.5 million = 31.25%
Let’s assume the SAM figure for this year has increased to $50 million, with our fictional startup rolling out a timesheet product for accountants at a lower price point — a service with a higher level of demand and uptake than its core product.
31.25% X $50 million = $15,625,000 (SOM).
So, SOM is calculated this way: Last Year’s Market Share X This Years SAM
Obviously, pre-revenue startups can’t use this formula as revenue data is necessary for the calculation.
For those already generating revenue and who’ve raised funding (or are in the process of fundraising), this is valuable data to have in your business plan and pitch decks.
Key takeaways: Calculating your Serviceable Obtainable Market
A Serviceable Obtainable Market (SOM) calculation is based on the percentage of market share and revenue captured last year, and the amount of revenue you could practically capture this year (SAM).
Each is a percentage of the total addressable market (TAM).
SAM is the percentage of TAM you can realistically reach, whereas SOM is grounded in the reality of what you managed to attain in your last fiscal year.
Both are incredibly valuable for setting realistic and achievable sales and revenue targets.
Investors, advisors, staff, and other stakeholders benefit. In many cases, they need to know these growth metrics, and, more importantly, the reasoning and data behind them.
As a founder, it’s irresponsible to set unachievable targets.
Founders should set inspiring targets, but ensure they’re grounded in reality.
Research and revenue-based data are essential if you want investors and team members to have faith in your leadership, decision-making, targets, and vision for your startup.
Understanding your TAM, SAM, and SOM is an integral part of making your vision, mission, and goals a reality.
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