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How Do Sportsbooks Make Money?

Source: pexels.com

The modern sports betting sector is extremely competitive with new sportsbook sites entering the market every month. But when you’re checking out the latest sports betting offers at Match.Center or other analytical websites do you ever wonder how exactly bookmakers make their profits? After all, if they have to offer odds on all sports events, aren’t they constantly in danger of losing money to betting professionals?

All About the Margin

Most bookmakers make their money thanks to what is known as the margin. The margin refers to the standard bookmaking practice of adding a little extra percentage to every betting option in every market to ensure that they make a profit, whatever the outcome.

You can work out the margin on a market yourself by converting each of the odds in that market into a percentage, adding the percentages together, then subtracting 100%.

For example, take a typical Premier League game with the following odds:

  • Wolves 5/2
  • Draw 11/5
  • Brighton 6/5

Converting these into percentages by dividing the second number into the total of the numbers we get:

  • Wolves 28.6%
  • Draw 31.3%
  • Brighton 45.5%

Adding these together, we can see that the total comes to 105.4%. If the odds set by the bookmaker were intended to represent their best guess at the true probabilities of the three outcomes, they would total 100%. The difference between the two numbers is the bookmaker’s margin or overround.

A Trip to the Casino

By ensuring that the odds always add up to more than 100%, bookmakers are attempting to replicate what happens with games of chance in a casino. For example, a typical roulette wheel will have 36 numbered spaces, 18 red and 18 black while offering Evens on a red or black bet. If there were only these 36 slots on the wheel the casino would break even in the long term, because Evens or 50% represents fair odds of either black or red occurring.

To make money, casinos must go further. In the case of roulette, there is an additional slot on the wheel: the zero. If the ball lands on zero, the house wins all bets. That small edge is what gives the casino its guaranteed profit in the long term.

Now imagine our original version of roulette in which there is no zero slot in the wheel, just 18 red and 18 black slots. How else could the casino make money? By adjusting the odds of the bets. So, at this roulette table, you may find that the odds for a bet on red or black are 10/11 rather than Evens. This time you are getting slightly less than fair odds for your bet. This, essentially, is how bookies make money.

The Traditional Bookie Model

Of course, a sports event is way more unpredictable than a roulette wheel. In fact, it is fundamentally different since you cannot ever know the ‘true’ odds of a sports event’s outcomes. This added complexity means that bookmakers cannot simply shave a little off the fair odds and sit back while the profit rolls in.

If a bookmaker’s starting assessment of the true odds is wildly inaccurate, then adding a margin to the market will not be enough to secure a profit. Shrewd sports punters who can spot big errors in the odds will take advantage of these mistakes and the size of the margin becomes irrelevant.

So, for a sportsbook, setting the initial odds and including a margin, is only the start of the process. Once a market is up and running it is monitored constantly with the aim being to ensure that the sportsbook will make a profit whatever happens.

If punters wager heavily on one team, the sportsbook may cut the odds on that team and increase them on their opponents, with the intention of deterring a bet on the former and encouraging a bet on the latter. This constant monitoring of the market means that sportsbooks can quickly identify any errors they have made and correct them, to ensure they lock in a profit.

The Exchange Model

The arrival of betting exchanges in the early 2000s brought a different form of model to the betting sector. On a betting exchange, odds are set by the punters who can ‘back’ or ‘lay’ each selection in a market, while the exchange operator simply takes a percentage commission from each winning bet. The result is that betting exchanges can produce markets with much lower margins since the operator is not concerned with manipulating the odds.

The weakness of the exchange model is that it only works if there are enough punters betting into the market. So, exchanges, from the beginning, have focused on attracting more customers. Traditional bookmakers are also increasingly focusing on growing their market share in this way, even to the extent of potentially making a loss on some markets, such as each way betting on Major golf tournaments.

Conclusion

Essentially, traditional bookmakers make a profit through the way that they set and manipulate the odds. They can be beaten, but doing so requires a lot of hard work, expertise and the ability to quickly spot mistakes: a combination that only a handful of punters possess.

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