… so our market share should be …
In an earlier section we discussed the market size for the business idea. We arrived at the portion of market which was available to the business, referred to as the SAM or served available market. Due to the competition, the business will only be able to realistically obtain a percentage of the SAM. This market share is referred to as the serviceable obtainable market or SOM.
To illustrate suppose the served available market (SAM) is 4.5 million and we expect to obtain 1% of this market. In this case the serviceable obtainable market (SOM) is calculated as follows.
SAM = 4,500,000 SOM = SAM x Market share % SOM = 4,500,000 x 1% = 45,000
The obtainable market share forms the basis of the revenue projection in the business plan financial projection. It is therefore important that the estimate of the market share is supported and justified by the marketing plan.
The SOM is not normally calculated using a bottom up approach. However, it is a useful exercise to perform the calculation to see whether the business is able to operate at a level indicated by the estimated market share.
To illustrate suppose we have market size estimates for SAM of 4.5 million in year one rising to 7.59 million in year five. Additionally based on available resources (staff, equipment, funding etc.), the business estimates that it can deal with 300 customers in year one and 1600 customers in year five. Assuming an average value per customer of 150, we can calculate a bottom up market share as follows.
Market share year 1 = Revenue / SAM = (150 x 300) / 4,500,000 = 1% Market share year 5 = Revenue / SAM = (150 x 1,600) / 7,590,000 = 3.2%
Using its available resources the business can support the market share calculated above. Consequently if the top down estimate of SOM is much larger than this the business need to rethink its plan to ensure compatibility with resources available.
Market Share Presentation
The business plan market share section can be presented in the format shown below. In this example, there is an initial brief comment about the market share, explaining its growth prospects and how it can be achieved. Additionally the SOM itself is shown in both monetary and % of SAM terms for years one and five.
The investor will view the SOM as the short term target for the business. They will be looking for this to be achieved without too many problems to show that the business idea has potential. If the business can achieve the SOM then with further investment, it should be able to penetrate the SAM even further.
This is part of the financial projections and Contents of a Business Plan Guide. The guide is a series of posts on what each section of a simple business plan should include. The next post in this series sets out details of the marketing strategy which the business intends to use to win its share of the market.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.