How Do Bookmakers Make Money? – A Complete Guide
How do bookies make money-In this essay, we’ll answer the frequently asked question: how do bookies make money? This involves backing and laying, balancing the book, compiling basic odds, and overrounding. We’ll also go over how you may apply what you’ve learned to become a more profitable and successful bettor.
So, how do the bookmakers make their money?
Bookmakers profit from the following activities:
- They determine the appropriate bet pricing (the vig)
- Establishing and altering the betting lines
- Keeping the Books Balanced – Getting Rid of Risk
- Bettor Emotions and a Lack of Knowledge
The Fundamentals of Bookmaking
The fundamental premise of bookmaking is simple and self-evident. A bookmaker receives money when they lay a bet to a customer and receives money when one of their customers wins a bet. The goal is to take in more money than you pay out. The art of bookmaking lies in ensuring that this occurs.
Bookmakers do not have influence over the outcome of sporting events, but they do have control over how much they stand to profit or lose on any given outcome. They establish the odds for all of the wagers they place, allowing them to guarantee a profit. This is how do bookies make money
The Overround/Charging Vigorish
The inclusion of vigorish is the primary strategy used by bookmakers to tilt the odds in their favor. Vigorish, sometimes known as juice, margin, or the overround, is a type of vigorish. It is embedded into the odds that bookmakers set to assist them in making a profit. In essence, it is a fee levied for laying bets. We’ll use the simple example of a coin flip to better demonstrate vig.
A coin toss has two possible outcomes, both of which are equally likely. There is a 50/50 chance of heads and 50/50 probability of tails. If a bookmaker offered actual odds on a coin toss, they would offer even money. This translates to 2.00 in decimal odds, +100 on the moneyline, and 1/1 in fractional odds. A winning $10 bet at even money returns $20, which is $10 profit plus the initial risk.
Assume this bookmaker has 100 customers, each betting $10 on a coin toss, with half betting tails and half betting heads. In this case, the bookmaker stands to lose all of his money.
How do bookies make money
As shown in the above figure, the bookmakers are taking in a total of $1,000 in wagers, but they must also pay out a total of $1,000 in prizes regardless of the outcome. This is obviously not a favorable circumstance because they are in business to generate money.
This is precisely why the vig is built into the odds. They may so guarantee, at least theoretically, that they will profit regardless of the outcome. When two events are equally likely, odds of 1.9091 (-110 in moneyline, 10/11 in fractional) are commonly used.
Continuing with the coin flip example, the chances on heads and tails remain the same, but they are now 1.9091. This means that a winning $10 bet would yield a total of $19.09 ($9.09 profit plus $10 initial stake).
Let’s see how the bookmaker does now, with 50 clients betting on tails and 50 customers betting on heads.
As you can see, the adjustment in odds has made a significant effect, and the bookmaker is now assured a profit on every coin toss. The total amount they pay out will always be $954.50 in comparison to the $1,000 in total wagers received. The vigorish, or overround, is their built-in profit margin of $45.50, and it’s commonly expressed as a percentage of total wagers received. In this situation, the vig is approximately 4.5 percent.
This is a simplified example, but it demonstrates how bookmakers adjust the odds to give themselves an advantage. When it comes to sporting events, things become a little more complicated because the alternative outcomes aren’t always equally likely. Many betting markets have more than two possible outcomes, and bookmakers aren’t necessarily going to make the same amount on all conceivable outcomes.
As a result of these factors, generating money as a bookmaker is more complicated than merely charging vig. Other approaches are needed to secure continuous profitability, which is where odds compilers come in.
The Function of Odds Compilers
Bookmakers’ odds are set by odds compilers. They are also known as traders, and their function is critical. The odds they set ultimately decide how much money a bookmaker is likely to make and how much money they are likely to take in in wagers. Pricing the market refers to the act of determining the odds for a sporting event.
There are several factors to consider when pricing up markets for sporting events. The fundamental purpose is to ensure that the odds appropriately reflect the likelihood of any given occurrence, while simultaneously guaranteeing that a profit margin is factored in. The likelihood of outcomes is mostly determined by statistics, but a certain amount of sports knowledge is frequently required as well.
Compilers must consequently be quite informed about the sports for which they are pricing markets; as a result, they frequently specialize in just one or two. They must also be well-versed in a variety of mathematical and statistical principles.
Consider how a compiler may price a market for a tennis match between Novak Djokovic and Andy Murray. Because these two players are so similar in ability, the compiler would have to evaluate a variety of criteria. They would consider current form and each player’s recognized capabilities on the relevant playing surface, for example. They would also consider the outcomes of previous meetings.
Based on all of these criteria, they may conclude that Djokovic has an about 60% chance of winning the match while Murray has an around 40% chance. Djokovic is at 1.67 and Murray is at 2.50, which about reflects these odds. These odds do not include any vig, which must be factored in as well.
Compilers, in general, have a target margin. This can vary greatly for a variety of reasons, but in this case, let’s assume the compiler prefers a margin of roughly 5%. They would cut the odds for each player by 5%, providing Djokovic 1.59 and Murray 2.38.
The bookmaker’s margin is computed by summing the reciprocal of all potential outcomes and converting it to a percentage. There are two possible outcomes in this case, and the following equation would be used.
As you can see, the compiler met his goal of a 5 percent margin. However, the work does not stop there. Compilers must also ensure that a bookmaker has a balanced book.
Making a Balanced Budget
When a bookmaker has a balanced book on a specific market, he stands to profit roughly the same amount regardless of the outcome. The outcome of an imbalanced book would effect how much is made, and it could even result in a loss. For obvious reasons, a balanced book is normally preferred, and this is what odds compilers strive for.
Using the tennis match as an example, a balanced book might look something like this.
As you can see, based on a total wager of $10,000, the bookmaker stands to profit $500 regardless of the outcome. This is the desired margin of 5%. Consider what would happen if the $10,000 in total bets was distributed evenly among both players.
The bookmaker has an unbalanced book in this case. He will profit if Djokovic wins, but he will lose if Murray wins. It’s usually a situation to avoid.
This is why the odds on sporting events change over time. Odds compilers will constantly change their odds to ensure that their book is balanced. In the preceding situation, for example, they may increase the chances on Djokovic to encourage more betting on his victory, or they could decrease the odds on Murray to discourage additional bets on his victory. They could even be able to accomplish both.
Adjusting the odds does not always result in a balanced book, but it typically does. This is one of the reasons why bookmakers place such a high value on bet volume. In general, more money means they are more likely to get the balance right. Markets are rarely completely balanced; the idea is just to come as close as feasible.
It’s worth remembering that oddsmakers don’t always seek an unbalanced book. If they are certain in a particular conclusion, they will endeavor to create a circumstance in which they will earn the most if it occurs. If they are certain that Djokovic will win the match against Murray, for example, they may decide to increase the odds on Murray in order to attract more business on that side of the book. This is how do bookies make money.
Laying & Backing (how do bookies make money)
Every wager has two sides. Anyone who is familiar with Exchanges, such as the Betfair Exchange, will recognize the possibilities to ‘back’ or ‘lay’ any specific outcome on a given event.
To back their expected outcome, a punter must first locate someone willing to take the opposing viewpoint, i.e. to lay the wager.
Betting Exchanges essentially eliminate the intermediary (the bookie), allowing punters to back and lay each other directly. The Exchanges make money by charging a commission on each trade done between punters on their platform.
That provides a quick overview of the ideas of backing and laying, which are the two main sides to any bet. Before Internet Exchanges, the best way to locate someone to give odds on an event — in other words, to lay that particular outcome – was a traditional bookmaker.
The Business Model of Bookmakers-how do bookies make money
To comprehend the bookies’ business model, we must first understand odds, how they are set, and how they relate to the true probability of each outcome occurring.
A coin toss was used as an example to demonstrate the Gambler’s Fallacy in a previous article. The coin toss will come in helpful again here, so let’s go over it again.
A coin toss can result in one of two outcomes: heads or tails. Each one has a 50/50 chance of landing. This results in ‘actual’ chances of Evens (2.00) for each event. When laying both outcomes at those odds, any bookmaker would have to take an equal amount of money on each outcome – say, £50 on each – in order to balance their ledger.
If heads, the bookmaker pays the winning heads backer £50. However, this would be offset by the £50 profit made by the bookmaker by holding the losing tails backer’s money.
Breaking even in this manner, on the other hand, would be a fruitless exercise for the bookie, whose sole purpose is to make a profit.
That gets us to the primary point of this article: how can bookmakers make money and ensure they are constantly profitable?
Overround, Vigor, and Juice (how do bookies make money)
However, the same approach applies regardless of how many outcomes are considered. The crucial issue for the bookie is that summing the indicated chance of each outcome yields a total figure greater than 100%.
Anything above 100% is the bookies’ profit. This is referred to as the bookmakers’ overround or the house edge. It is referred as as vigorish in the United States (shortened to vig). It is sometimes called colloquially as ‘juice’ or a variety of other terms. All of these terms, however, are simply abbreviations for the bookmakers’ profit margin.
Now, let’s look at a 1X2 market on a football game to see how the bookmaker uses an overround.
In this case, with odds quoted as a fraction, it’s simple to convert them to decimal odds to view the implied probability (if you’re stuck, use our odds conversion calculator).
- 1 (Win at Home): 27/20 (fractional odds) = 2.35 (decimal odds) = 42.55 percent (implied probability)
- X (Draw): 23/10 = 3.30 = 30.30%
- 2 (Away Win): 23/10 = 3.40 = 29.41%
Adding the implied probability of all three events (42.55 + 30.3 + 29.41) yields 102.26 percent. This results in an overround of 2.26 percent, ensuring the bookie a profit regardless of the outcome.
That 2.26 percent may not seem like much, but keep in mind that it applies to every single wager, everywhere. With millions of pounds staked on hundreds of thousands of events every day, it’s easy to see how this might quickly add up.
Compounding (how do bookies make money)
Unsurprisingly, bookmakers are dissatisfied with a profit margin of only 2.26 percent. So they’ve got a couple more gimmicks up their sleeve. The most obvious and widely used method is to provide various options. As a result, doubles, trebles, and accumulators enter the picture.
Calculating the overround on each option will allow you to determine whether you have a ‘value’ bet based on your own market predictions.
In the preceding example, you select the 1X2 options with a market overround of 2.26 percent. What happens if you add a second pick to make a double? (For the sake of simplicity, we’ll keep the odds the same.) So the bookie has an additional 2.26 percent overround or profit margin, for a total overround of 2.26 + 2.26 = 5.52 percent, compounding their profit margin.
On three selections (all with the same odds), that translates to 2.26 + 2.26 +2.26 = 7.78 percent. As you add selections to your accumulator, this continues to multiply. So, not only are the odds of your wager landing increasing, but the bookies’ profit margin is increasing as well.
Having said that, don’t let this deter you – accumulators still have their advantages. You may receive a higher overround, but you also have the opportunity to win large sums of money for a very modest investment. Also, keep in mind that because accumulators are so popular with bookies, you can often earn really substantial promotions on them.
Furthermore, keep in mind that betting should always be about increasing your enjoyment of a sport. One of the things we really like about accumulators isn’t anything tactical: it’s just a terrific way to invest in games, especially long tournaments. It can give a thread that can make even the most uninteresting-looking games intriguing.
Finally, if you put a fiver on an accumulator bet that kept you invested in numerous games when you would otherwise have been less interested, and you lose, we would consider that money well spent, even if it didn’t take the sting out of the defeat.
Why do bookmakers provide promotions?
One of the most popular questions we get about how bookmakers make money is why they give promotions. To put it another way, if a bookmaker’s goal is to make money, why would they offer a legitimately substantial promotion? This issue is typically asked by people who are skeptical about bonuses and promotions in general, and just cannot understand how they could bring value without some devious terms and conditions that make it far from worthwhile to participate.
Before we go any further, we want to state unequivocally that we are fully aware that some promotions are wolves in sheep’s clothing, with inadequate value and titles that are purposefully misleading. That is why, before making any recommendations, we thoroughly review all of the terms and conditions of any promotion we consider.
Having said that, there is no need to be skeptical in general. Competition is a very excellent cause for bookmakers to be generous with their promotions. They are willing to risk losing a small amount of money on a free bet, for example, because the sheer amount of competition means that they cannot be certain of gaining and retaining users, which are the lifeblood of their business and the source of their revenue, if the customer chooses to go elsewhere.
Because there are so many operators out there, excellent promotions are viewed as an investment in what they hope will be the retention of a long-term and loyal customer because they are satisfied with the product that they have been supplied.
Should You Place Your Bets on Favorites or Outsiders?
Remember when we talked about how market swings affect the requirement for market balancing? In terms of the quality of the odds, this can make favourites or outsiders objectively better or worse than others. When the favorites receive a large amount of support, this is a clear example of this. To prevent losing a large sum of money if the favorites win, the market may need to discourage additional betting by lowering these odds, thus providing an artificially ungenerous prediction.
Because there is so little backing for them, you may often obtain really good long shot bets. The outrageously absurd odds on Leicester City winning the Premier League are possibly the most obvious example of this. When there are such oscillations, it usually favors the outsiders, whether with superb long odds or ungenerous short odds.
Having said that, we believe that this is something to ponder about rather than putting your entire betting strategy on. Simply look for places where you disagree with the prognosis and believe you are getting a good deal on odds, whatever they may be. However, we believe it is worth keeping an eye out for outsider bets that appear to be a little more generous.
How to Apply All of This Knowledge to Become a Better Bettor
To outsiders, bookmakers often have a strange edge to them, as if their business and odds are somehow safeguarded by powers and intellect beyond our comprehension. When you break down how things function, they can appear intimidating.
But, in the end, we want to be able to use this information to our benefit. Taking into consideration what we now know about bookies, we will break down what we believe are the five most crucial pieces of advise for using this information to make smarter bets.
Select Reputable Bookmakers
When you look at how these organizations operate, it becomes clear that, while bookmaking can be a very profitable business, maintaining success is an extremely hard and tough task. This is especially true when you consider the complexity of the situation as well as the quantity of competition available.
The greatest bookmakers recognize that the only way to generate money is to have a huge client base, and the only way to achieve that, given the number of competing options available, is to keep customers as pleased as possible. This includes the greatest possible odds, promotions, customer service, quality, and variety. The single most important thing you can do to get started betting on the right foot is to choose a reputable bookmaker, such as those included in our best bookies table at the beginning of this article.
Use the Overround to assess the market’s quality.
We addressed the overround previously, and it truly is one of the greatest, most reliable means of determining the overall quality of that betting market. Add up all of the alternatives, convert them to percentages, and see what happens. The closer you are to 100%, the better. With strong margins in general, you can then begin to deduce what your best betting selections are based on those odds.
Take Advantage of Promotions
We hope that one of the points we’ve made obvious in this post is that competent bookies offering great value promotions not only make sense, but it’s also a wise long-term business practice. This means you have no need to be skeptical of bonuses in general, because most of that skepticism stems from individuals not understanding how this fits rationally into a for-profit organization. As previously stated, the answer is simple: competition and your value as a consumer.
So, keep a close eye on your deals to ensure you’re getting the most out of them. Check out our advice, for example, but remember to use them because they can lead to a more happy and profitable betting experience.
Select a Site That Is Technologically Sound
This is one for all of you live bettors out there. We’ve talked about market swings and how knowing them is important not only for how betting sites generate money, but also for how you can bet intelligently. There is no situation in which this is more important than during live betting, especially during a game with many twists and turns.
In this case, the only option to react as quickly as possible and bet as successfully as possible is to use a technologically sound, rapidly updating website. So, when choosing a bookmaker, don’t overlook the value of a live experience.
Make use of various markets
As previously said, smart betting is all about identifying areas where you disagree with the bookmaker on the likelihood of an event. It’s your wits versus theirs, but they don’t make many errors. Diversifying into multiple marketplaces just gives you additional opportunity to find fantastic value odds and where you believe you can best place your money. In more ways than one, betting is a numbers game.
Backing and laying, odds compilation, implied probability, and over-round or vig are the key building components on which bookmakers rely to ensure that their profit is guaranteed regardless of the outcome. This, however, should not be seen negatively. Finally, we want bookies to stay in business, and so should everyone who uses them, because without those benefits, your betting options would be much more limited. Those benefits, like as the overround, are like a ticket price: it’s the reality of being able to wager on so many different things and win real money as a result. Also, just because bookmakers must win more than they lose does not mean that the outcome of your bets is set in stone. Other individuals win, and you may considerably boost your chances of being one of them by selecting good bookmakers and following wise practices. Reading our article on How to Bet Online will help you understand the notion of online betting.
How do bookmakers make their money?
To put it as simply as possible, bookies profit from people who place and lose bets. Aside from all other complexities and how much goes into them regularly winning enough to make this viable, that is the cornerstone of this firm.
Is it true that the house always comes out on top?
No, bookmakers dish out millions in losses on a daily basis. It’s only that they outnumber their opponents. You will win money if you make a prediction and it comes true. That’s all there is to it.
What exactly is an overround?
You may be wondering how bookies generate money on a constant basis. That’s due in part to something known as the overround. This is the sum of all conceivable outcomes that is more than 100 percent. In terms of odds, it is effectively the advantage they have over the player. This is something you must deal with, but it is just necessary to keep bookmakers in business. And the overround should never be severe, just a few percentage points above 100%. In general, less than 110 percent is to be expected.
Is it true that you should never place a wager on a favorite?
No, if you believe the favorite will win, especially if you believe they are still underappreciated despite being favorites, then backing them is still the wise choice. People say this because favorites frequently have lower odds than they should have due to a large number of people backing them. However, this is done on a case-by-case basis. Favorites can still be had at reasonable odds.
Where do promotions fit into the business plan of a bookmaker?
It is a frequent misconception that because bookies are attempting to make money, they would not provide true value in their promos. However, this is a short-sighted approach. To continue in business, bookmakers need customers to wager on their site instead of all the others out there, and many of them see promotions as a minor price to pay to entice visitors through their virtual doors. Simply put, promotions can provide genuine value.