How To Conduct a SOM Analysis

November 11, 2024

As we discussed in our blog post, Evaluating Market Potential to Prioritize Growth, Serviceable Obtainable Market (SOM) analysis is a vital component of strategic marketing, enabling businesses to set realistic growth targets, optimize their marketing strategies, and evaluate their competitive position. With a well-executed SOM analysis, businesses can pursue market opportunities more effectively, leading to sustainable growth in competitive markets. We continue to explore the concept of SOM analysis in this blog post, and how to lay the groundwork for a data-driven strategic marketing plan that guides the allocation of resources, product development, and sales efforts. 

SOM Analysis - 7 Key Steps

SOM analysis involves narrowing down from TAM and SAM to estimate the market share a business can realistically capture. A SOM analysis includes 7 key steps:

Start with a Clear Definition of the SAM: The first step in conducting a Serviceable Obtainable Market (SOM) analysis is to define the Serviceable Available Market (SAM), which represents the part of the Total Available Market (TAM) that a business can realistically serve with its products or services. To determine the SAM, companies need to look at the broadest segment of the market where they have a viable offering, factoring in geographic, demographic, and industry-specific constraints. For example, a company selling a specialized software solution for healthcare organizations would exclude markets outside of the healthcare industry and limit their SAM to regions where they are licensed to sell. This focused definition of the SAM provides the basis for a more refined estimate of SOM, as it identifies the broad target audience that can be realistically addressed. By establishing a clear SAM, businesses can begin to assess where within this broader market they have the best chances of success.

Analyze the Competitive Landscape: Understanding the competition is crucial in estimating how much of the SAM a business can realistically capture. This step involves identifying key competitors within the SAM, analyzing their market share, strengths, weaknesses, customer loyalty, and positioning. A thorough competitive analysis gives insight into how saturated the SAM is and where potential market entry points exist. For instance, if a company finds that several major players dominate the market but have underserved certain customer segments, this knowledge can reveal opportunities for capturing market share. Competitor analysis also involves examining competitors’ pricing strategies, marketing approaches, and customer retention rates to better understand what differentiates your company and how that can be leveraged within the SAM. Knowing the competitive dynamics helps to narrow down the SOM further, focusing on areas where the company has the best chance to succeed.

Assess Internal Capabilities: To estimate the SOM accurately, a company must assess its own strengths, weaknesses, resources, and operational capacity. Factors such as production capacity, marketing budget, technological capabilities, and staffing all affect a company’s ability to capture market share within the SAM. For instance, a small company with limited distribution channels might realistically capture a smaller portion of the SAM than a large company with extensive distribution networks. Understanding internal limitations and strengths also provides a clearer picture of the investments needed to increase SOM. For example, a company with strong technological infrastructure and a well-trained sales team may be well-positioned to pursue a higher SOM percentage if it can leverage these resources effectively. This step ensures that the SOM is aligned with the company’s operational reality, making projections feasible and guiding internal resource allocation to maximize market capture.

Identify Target Segments: Once the SAM and the company’s internal capabilities are defined, it’s essential to identify specific target segments within the SAM that align best with the business’s competitive advantages. This might involve segmenting the market by customer demographics, business size, geographic region, or any other defining factor that makes certain groups more likely to engage with the company’s offerings. For instance, a company selling accounting software might focus on small to medium-sized businesses within specific industries, such as retail or manufacturing, rather than trying to reach all potential users. By narrowing down to specific segments, the company can concentrate its resources and tailor its marketing messages to resonate with these high-potential groups. Identifying target segments provides a focused direction for marketing and sales efforts, enhancing the effectiveness of outreach strategies and helping the company realistically estimate its SOM. Read our case study here.

Estimate Conversion Rates: Estimating conversion rates within the target segments is a critical part of calculating the SOM. Conversion rates represent the percentage of potential customers within the SAM that a business can expect to convert into actual buyers. Estimating these rates accurately involves looking at past performance data, industry benchmarks, and the effectiveness of current marketing strategies. For example, if a company has historically converted 10% of its leads in a specific industry, it might use this conversion rate to project future sales within that segment. Additionally, conversion rates can vary based on factors like customer awareness, competitive offerings, and customer retention strategies. By understanding and applying realistic conversion rates to the SAM, companies can arrive at a more accurate SOM figure that reflects achievable sales rather than aspirational targets. This step grounds SOM in evidence, increasing the reliability of the projections.

Calculate the SOM: Once conversion rates are estimated, businesses can calculate their SOM by multiplying the number of customers they expect to reach in each target segment by the expected conversion rate and the average revenue per customer. This calculation gives a revenue projection based on the company’s actual capacity to capture market share. For instance, if a company estimates it can reach 5,000 potential customers in a target segment, with an expected conversion rate of 15% and an average revenue per customer of $1,000, then the SOM for that segment would be $750,000. Conducting this calculation across all identified target segments provides a comprehensive view of the total SOM. This process helps businesses translate their market analysis into tangible revenue opportunities, giving them a clear goal to pursue within the obtainable market. Accurate SOM calculations are essential for setting realistic financial objectives and guiding budget allocations across various segments. Read our case study, Evaluating Obtainable Market Potential to Prioritize Growth.

Incorporate Market Trends and Economic Factors: Finally, to refine the SOM estimate, companies need to consider broader market trends, economic conditions, and industry-specific developments that may impact their ability to capture market share. These factors could include changing consumer preferences, regulatory shifts, technological advancements, or economic cycles. For instance, if an economic downturn is expected, it might lower the SOM as fewer customers are willing or able to buy, even within the identified segments. On the other hand, a positive trend, like increased adoption of digital solutions in an industry, could increase the SOM. Incorporating these factors helps ensure the SOM reflects a dynamic market environment and accounts for potential fluctuations. Adjusting SOM estimates based on market trends not only adds realism but also prepares the business for proactive planning in response to anticipated changes, making the SOM projections a reliable foundation for the company’s strategic marketing plan. Read our case study,

Final Thoughts

A Serviceable Obtainable Market (SOM) analysis requires data collection and insights from a variety of sources. While the process may seem daunting, it can help set businesses up for future success by establishing guardrails along which to construct a well-thought-out marketing strategy.