Serviceable Obtainable Market (SOM)

What is the serviceable obtainable market?

Serviceable obtainable market (SOM) denotes the part of the serviceable addressable market (SAM) that a company can realistically tap within a defined period. It means the customers that it wins and retains in that time with its product, its sales organisation and the planned capital. It is stated as annual revenue at the end of the period under review, usually after three to five years; for subscription models, as annual recurring revenue. In German the SOM is called gewinnbarer or realistisch erreichbarer Markt.

The SOM is the lowest level of market sizing from total addressable market (TAM), SAM and SOM and the only one that is a planning variable. It must therefore agree with the revenue plan in the financial model, the multi-year set of figures of corporate planning. In the business plan, pitch deck and information memorandum, it stands alongside TAM and SAM. Before an investment or purchase, investors and buyers examine it in due diligence together with the sales plan, the headcount plan and customer data.

Calculating the SOM: derivation from sales capacity

Common but not very robust is setting a market share on the pattern SOM = SAM × assumed share. The company thereby assumes that it will win a certain percentage of the SAM in three years. Such an assumption can neither be checked nor linked to the use of funds. A derivation from the resources that actually win customers is sustainable:

• Sales capacity: number of sales staff per year, reduced by the ramp-up time of new hires, which in practice often amounts to several months.
• Productivity: qualified sales opportunities per fully productive salesperson, that is, prospects with confirmed need and budget, and the close rate, the share of these opportunities that leads to a contract. Both values come, where possible, from the company's own historical data.
• Further channels: closings through partners, referrals or an online channel, each with its own capacity or conversion assumption.
• Churn: customers who cancel in the period. The SOM is a stock at the end of the period, not the sum of all customers ever won.
• Price: the expected average annual value per customer, derived from the segment structure of the new customers.

Formula: SOM = (current customers minus churn plus new customers in the period) × average annual value per customer, with new customers per year = effective salespeople × qualified sales opportunities per salesperson × close rate

This calculation also answers the question of what the capital is needed for. If the SOM is to be larger, it shows where to start: additional salespeople, a higher close rate, a further channel or a higher price. Each of these levers causes costs that must appear in the financial model.

SOM, revenue plan and headcount plan

SOM and revenue plan describe the same customers and must therefore contain the same figures. If the plan shows more annual recurring revenue (ARR) at the end of the period than the SOM allows, one of the two calculations is wrong. The revenue of the last plan year in the income statement regularly lies below the SOM, because new customers are added spread across the year and generate revenue only from contract start.

The headcount plan must contain the salespeople on which the SOM rests, with start date and cost. The customer acquisition costs follow from the ratio of these costs to the customers won. Investors measure them against key figures such as the CAC payback period, the number of months until a new customer has earned back their acquisition costs. An SOM that grows without additional sales costs can hardly be defended in the review.

How investors recalculate the SOM

On the market slide of the pitch deck, investors first check whether the SOM names a period and fits the revenue plan. In due diligence, they then break it down into its assumptions and compare each with the company's results so far. If the planned close rate is above the historical one, a justification is needed, such as a new product module or better access to decision-makers. Churn is reconciled with the cohort evaluation (cohort analysis). It shows how many customers of an acquisition vintage are still customers after one, two or three years. The assumed number of sales opportunities is compared with the opportunities currently open in sales (sales pipeline).

Competition also enters the review. In markets with established providers, the close rate falls as soon as the company addresses segments outside its core target group. Because the close rate is usually the most sensitive factor in the calculation, investors often recalculate the SOM with a lower rate. They then check whether financing and runway, that is, the period for which the available liquidity lasts, are sufficient in that case too.

Worked example: calculating the SOM from sales capacity

Hypothetical example market as for the TAM and SAM: software for maintenance planning in manufacturing plants, SAM 12,000 plants at an average of EUR 12,000 a year, that is, EUR 144 million. The company has 100 customers today. All figures are freely chosen.

• Sales: in year 1 two fully ramped-up salespeople; in year 2 three new salespeople in addition, who are half effective in their first year; in year 3 five fully ramped-up salespeople
• Effective capacity: year 1: 2.0; year 2: 2 + 3 × 0.5 = 3.5; year 3: 5.0 full salespeople
• Productivity: 120 qualified sales opportunities per full salesperson and year at a close rate of 25%, that is, 120 × 0.25 = 30 new customers per full salesperson and year
• New customers: year 1: 2.0 × 30 = 60; year 2: 3.5 × 30 = 105; year 3: 5.0 × 30 = 150
• Churn: 10% of the stock at the start of the year, annually
• Stock at end of year 1: 100 minus 10 plus 60 = 150 customers
• Stock at end of year 2: 150 minus 15 plus 105 = 240 customers
• Stock at end of year 3: 240 minus 24 plus 150 = 366 customers
• SOM after three years: 366 × EUR 12,000 = EUR 4,392,000, about EUR 4.4 million or about 3% of today's SAM

The cross-check with the financial model follows. If the revenue plan envisages recurring revenue of EUR 6 million for the end of year 3, that corresponds to EUR 6,000,000 / EUR 12,000 = 500 customers. Of the 240 customers at the start of year 3, 240 minus 24 = 216 remain at the same churn. So 500 minus 216 = 284 new customers would have to be won in the third year, which is 284 / 30 = about 9.5 effective salespeople instead of 5.0. Either the headcount plan contains these salespeople including their costs, or the revenue plan must be adjusted to the SOM.

Distinctions: SOM, revenue plan, market share and sales pipeline

• Revenue plan: the planning of all revenue in the financial model. The SOM is its market-related core and must agree with the recurring revenue at the end of the period.
• Market share: the ratio of own revenue to market volume, that is, to the current spending of all customers with all providers. The share of the SOM in the SAM, by contrast, measures penetration of the potential. Because market volume is usually smaller than the potential, the market share comes out higher than this penetration.
• Sales pipeline: the currently open sales opportunities. It supports the short-term assumptions of the SOM but does not extend over the entire period.

Common mistakes

• Share set rather than derived. An assumed percentage of the SAM is not a calculation; it can neither be checked nor tied to sales costs.
• Full productivity from day one. New salespeople need ramp-up, and open positions are often filled later than planned.
• Churn forgotten. Anyone who adds up all customers won overstates the stock and thus the SOM.
• No period. An SOM without a time reference cannot be evaluated, because with a long enough horizon any figure appears achievable.
• Deviation from the plan. If SOM and recurring revenue in the financial model diverge, this is noticed in every review and puts both calculations in question.
• Competition ignored. Close rates from a core segment with few competitors cannot be transferred to segments in which established providers already serve the customers.

Frequently asked questions

How is the SOM calculated?

From the customer stock at the end of the period, multiplied by the average annual value per customer. The stock results from today's customers minus churn plus the new customers that the effective sales capacity wins at the expected close rate. In the worked example, that is 366 customers at EUR 12,000 each, that is, about EUR 4.4 million after three years.

What is the difference between SOM and SAM?

The SAM is the serviceable market at full penetration; the SOM is the part of it that the company actually wins in the period under review. The SAM follows from product, regions and sales channels; the SOM from sales capacity, close rate and churn.

Over what period is the SOM calculated?

Usually over three to five years, matching the horizon of the financial model. The period always belongs with the figure, for example in the form "SOM after three years".

Is a small SOM a disadvantage in a funding round?

Not if it is substantiated and the SAM leaves room for further growth. A small SOM that is derived comprehensibly, with a recognisable path to enlarging it, convinces more in the review than a large figure without derivation.

Do existing customers belong in the SOM?

Yes. The SOM describes the entire customer stock at the end of the period, that is, today's customers minus churn plus new customers. Revenue expansion among existing customers can be taken into account separately if it is evidenced with revenue retention data (retention rate). These data show how revenue from existing customers develops, including expansions and cancellations.

The Roemer Capital view

In client mandates, Roemer Capital derives the SOM from sales capacity and links it in the financial model directly with the headcount plan and the revenue plan. A change to hiring dates, close rate or churn thus changes SOM, costs and capital requirement at the same time. The three cases of the model, base case, cautious case and optimistic case, differ in exactly these assumptions.

Before the documents are sent out, Roemer Capital ensures that pitch deck, business plan and financial model show the same SOM. Investors recalculate the market derivation in the review; a consistent figure saves follow-up questions and keeps the discussions on the topics that decide the valuation.