Is the Serviceable Obtainable Market (SOM) more important than Total Addressable Market (TAM)?
Short answer: Depends.
If the size of the SOM is more important than the size of the TAM depends on the context and the stage of the business.
- For early-stage startups focusing on proving their business model, SOM is way more immediately relevant than TAM, because it represents the portion of the market they can realistically capture in a short to medium amount of time. It helps in setting achievable goals and aligning resources where they can have the most impact.
- For investors or for long-term stratig planning, TAM is highly crucial as it indicates the business’s growth potential and the overall market opportunity. A large TAM suggests that there is significant room for growth and potentially a high ceiling for the business’s expansion.
Neither is inherently more important than the other; their relevance varies depending on the business’s objectives, stage, and strategies.
Understanding both metrics - TAM and SOM - enables us to assess our business idea effectively and act with high precision, and ultimately, achieve more success.
High SOM
📈 When the SOM size is high, a business has significant growth and revenue potential within its accessible market, suggesting a robust opportunity for expansion and profitability. A high SOM indicates a larger target customer base and the possibility of scaling operations effectively.
Low SOM
📉 A low SOM size suggests a limited market segment that can be realistically served, potentially capping the business’s growth and revenue prospects. This limitation requires the business to optimize operational efficiency and possibly diversify or innovate its offerings to tap into new market segments or increase its market share within the constrained space.
Evaluate your SOM (Regularly)
👌 So, regularly (re-)evaluating your SOM size is mandatory. But how regular?
- Anually: This allows businesses to adjust their strategies based on market growth, competition, and changes in customer needs.
- After significant market changes: If there are significant shifts in the market, such as new regulations, disruptive technologies, or major competitive movements, reassessing SOM sooner can help a company adapt its strategy to maintain or improve its market position.
- Before major business desicions: Before launching a new product, entering a new market, or making substantial changes to the business model, re-evaluating SOM can provide critical insights that influence those decisions.
