Overview of Market Segmentation:

Now that we've explained what serviceable obtainable markets are, we'll look at how they fit into the bigger picture of market segmentation.

Market segmentation is a fundamental strategy that helps businesses identify and target specific groups within a broader market effectively. By breaking down a market into smaller, more manageable segments, businesses can allocate resources more efficiently, tailor their messaging to particular audiences, and ultimately increase their chances of success.

This approach divides the market into three primary categories:

1. Total Addressable Market (TAM): The Total Addressable Market represents the largest possible market for a product or service, assuming no constraints in competition, market reach, or resources. TAM is a critical starting point for understanding a product's potential scale in an ideal world where every possible customer is accessible. Businesses often calculate TAM by analyzing industry data, consumer trends, and the value of all products or services sold within a category. It sets the upper limit on the size of a market opportunity. To learn more about TAM, we recommend our guide: Total Addressable Market (TAM).
2. Serviceable Addressable Market (SAM): The Serviceable Addressable Market narrows down from TAM to include only the portion of the market that a business can realistically serve based on factors like geographic reach, target demographics, and operational capabilities. For instance, while a global market may exist for a product, a company with limited distribution channels may only serve specific locations. SAM identifies where a company's efforts are most feasible, helping to refine its focus and create attainable goals. To learn more about SAM, we recommend out guide: Serviceable Addressable Market (SAM).
3. Serviceable Obtainable Market (SOM): The Serviceable Obtainable Market is the most refined segmentation and focuses on the realistic share of the SAM that a business can expect to capture. Calculating SOM requires a thorough analysis of competition, market conditions, and internal resource limitations. It's a practical assessment of what can be achieved in a given timeframe, based on a company’s capabilities and strategic positioning. By understanding SOM, businesses can set achievable sales targets and focus their marketing efforts precisely where they have the greatest potential to succeed.

By clearly distinguishing between TAM, SAM, and SOM, businesses are better equipped to make strategic decisions, effectively allocate resources, and set realistic goals for market share.

Calculating a Serviceable Obtainable Market (SOM)

Accurately calculating your Serviceable Obtainable Market (SOM) is a good first step in understanding the revenue potential of your business within a specific target market. Two common approaches to determining SOM are the bottom-up method and the top-down method. Both have unique advantages, and using them effectively requires thorough market research and reliable data.

• Bottom-Up Approach: The bottom-up approach involves building your SOM calculation from detailed data specific to your business operations. This entails starting with your core customer base and scaling the values realistically. For example, you might use the average revenue per customer multiplied by the total number of target customers you could realistically serve. This method requires granular data about your customer demographics and purchase behaviors.
• Top-Down Approach: The top-down method, on the other hand, begins with broader market figures and narrows them down systematically to estimate your SOM. Starting with your Total Addressable Market (TAM), you then refine the calculation by factoring in the Serviceable Available Market (SAM) before accounting for factors such as operational constraints, competitive dynamics, and unique positioning to arrive at the serviceable obtainable market.

Importance of Accurate Data:

Whether you use the bottom-up or top-down method, ensuring the accuracy and reliability of your data is vital. Relying on outdated or irrelevant information can lead to overestimating or underestimating your potential market size, which may affect strategic decisions. Investing in robust market research helps minimize errors and supports better-informed calculations.

Example Calculation:

To better illustrate, let's consider a hypothetical example of calculating SOM using the bottom-up approach. Assume you own a local fitness studio, and the average revenue per customer is $500 per year. Market research shows that there are 10,000 individuals in your city interested in fitness, but only 2,000 of them fit your target demographic for pricing and location. Out of these, your studio has the capacity to serve 500 customers annually due to limited space and staffing. By multiplying your revenue per customer ($500) by the maximum number of customers you can serve (500), your SOM would be $250,000 annually.

Understanding the nuances of calculating SOM helps businesses gain insights into their actual revenue potential and informs strategic decisions on business growth and resource allocation. This process ensures you focus on the market segments you can effectively serve and succeed in.

Recommended Resources:

• Total Addressable Market (TAM)
• Serviceable Addressable Market (SAM)
• Organic Growth vs. Inorganic Growth
• Customer Acquisition Strategy