Serviceable Obtainable Market (SOM)

The Serviceable Obtainable Market (SOM), sometimes called the 'Share of Market', is the portion of the market that a specific company can realistically capture. Think of it as the company's near-term sales target. While its bigger siblings, the Total Addressable Market (TAM) and Serviceable Available Market (SAM), paint a picture of the entire universe of potential customers, SOM brings the focus down to earth. It answers the crucial question: “Given our products, sales channels, competitors, and resources right now, how much of the target market can we actually win over in the next couple of years?” For a value investor, SOM is where the rubber meets the road—it’s a reality check that cuts through hyped-up growth stories and helps ground a company's valuation in achievable results. It’s the difference between saying “everyone on Earth could drink our soda” and “we can realistically sell our soda to 10% of the people in this city this year.”

For investors who prize prudence and a margin of safety, SOM is a far more useful metric than the sprawling, often-hyped TAM. It provides a tangible, short-to-medium-term target that can be measured and tracked.

• A Grounded View of Growth: Management teams love to talk about the massive TAM for their industry. A value investor, however, is more interested in the company’s concrete plan to capture its slice of the pie. SOM forces this conversation, shifting the focus from blue-sky potential to a company's actual execution capabilities. It helps you assess whether a company's growth targets are ambitious but achievable or simply fantasy.
• Input for Valuation: Your estimate of a company's future free cash flow is only as good as your revenue projections. SOM is a critical input for this. By understanding the realistic market a company can obtain, you can create more conservative and reliable forecasts, leading to a more sensible valuation.
• Indicator of a Moat: If a company consistently captures a large or growing percentage of its SAM (i.e., has a strong SOM), it's often a sign of a powerful competitive advantage, or moat. Why are customers choosing this company over direct competitors? Is it brand, price, technology, or service? Analyzing the “why” behind a strong SOM can reveal the durability of the business.

Imagine you're opening a gourmet pizza restaurant. The market can be broken down simply:

1. TAM (Total Addressable Market): The entire global demand for pizza. Everyone in the world who might ever eat pizza. This is a huge, but practically irrelevant, number for your single shop.
2. SAM (Serviceable Available Market): The portion of the pizza market you can realistically serve. Let's say it's everyone within a 5-mile delivery radius who eats gourmet pizza. This is your target market segment.
3. SOM (Serviceable Obtainable Market): The portion of your SAM you can actually capture. Considering the three other popular pizzerias in your delivery zone, your marketing budget, and your kitchen's capacity, you realistically estimate you can win 25% of the local gourmet pizza business in the first two years. This is your SOM—your realistic slice of the pie.

Estimating SOM is more of an art than a precise science, but it should always be backed by evidence. There are two primary approaches:

This method starts with the broader SAM and narrows it down. You take the total size of your serviceable market and multiply it by a realistic market share percentage you believe the company can achieve.

• Example: The market for specialized accounting software for small law firms (your SAM) is $200 million annually. Given your company's product features and the three major competitors, you estimate you can realistically capture 8% of this market.
• Calculation: $200,000,000 (SAM) x 0.08 (Projected Market Share) = $16,000,000 (SOM).
• Warning: The weakness here is the market share assumption. It can be easy to plug in an optimistic number without sufficient justification.

This is often the preferred method for diligent investors as it's built on real-world data. You build the market size from the ground up by looking at the company's actual sales and capacity.

• Example: Your software company's sales team can realistically contact 2,000 law firms per year. Historically, your closing rate is 10%, and the average annual contract value is $8,000.
• Calculation: 2,000 (firms) x 0.10 (closing rate) x $8,000 (contract value) = $1,600,000 (SOM).
• This approach is more conservative and directly tied to the company's operational capabilities.

When analyzing a company's market potential, be wary of a few common traps.

1. The “1% Fallacy”: Avoid the logic that says, “The market is $100 billion, so if we just get 1%, we'll be a billion-dollar company!” This lazy, top-down analysis ignores the intense competition and execution required to capture even a tiny sliver of a large market.
2. A Static Figure: SOM is not fixed. A brilliant new product, a failed competitor, or an expanded sales force can increase a company's SOM. Conversely, a new, powerful competitor or a strategic blunder can shrink it.

Ultimately, SOM is a powerful tool for the discerning investor. It helps you cut through the hype, focus on what a company can realistically achieve, and build an investment thesis based on evidence rather than dreams.