How do betting companies make money
Going by the number of online gambling sites, online betting companies seem to be making money. As more and more bettors continue to place their wagers and win, so are bookmakers cashing in. As a gambler, you may be wondering how bookies make money considering they payout winnings and offer gamblers various incentives.
There is the misconception that betting companies make money when gamblers lose their wagers. The truth is, bookmakers run a profitable business by ensuring the book balances regardless of whether the gambler wins or loses. This way, the bookie always wins. So, how do bookies make enough money to pay off winnings and earn a profit? Read on to find out.
The basic principle of betting companies’ business model
Although a bookmaker may not control the outcome of a game, they can, for the most part, control how much they will win or lose on any given outcome. The basic principle of betting companies is to take in more money than they will payout. In order to accomplish this, betting companies preset odds that not only reflect probabilities but also include a margin to make sure they make a profit regardless of how small it is for each bet. Betting companies make money in four ways:
- Setting the right bet price
- Setting and altering the betting lines
- Balancing the book
- Depending on the bettor’s emotions and lack of knowledge
Setting the Odds
Odds are designed to not only represent the probability of an outcome for each event but also the profitability of the bookmaker. When compiling the odds, odds compilers include a built-in profit margin for the betting companies. For all the fixed odds, betting companies ensure they support each result in the right proportion in order to earn a profit regardless of the outcome.
Best value Odds
Since simpler markets tend to have fewer variations and random outcomes, they generate better margins for betting companies. In head-to-head markets that have two choices or match outcomes to three choices like Win/Draw/Win, the margins tend to be low. The reason is the bookie no longer has to work as hard to balance the books. In such cases, the margin is less than 5%.
However, if there are more varied outcomes in the market, then the margins tend to be higher in order to control variation and unbalanced books. Outcomes such as correct scores will have plenty of options and as a result, have higher margins. The most popular sports have the least margins built in them as a way of ensuring bookies remain competitive.
One technique betting companies use to ensure the odds are in their favor is the inclusion of vigorish also known as margin. The margin is built into the odds of betting companies to help them earn a profit. In essence, they are commissions charged for placing bets.
A good example of explaining betting margins for bookmakers is a coin toss with a bet of ₹2000 would be 50/50 or evens for tails or heads. The chances of the coin landing on either side is 50% meaning the odds would be 2 for both sides. Therefore, your ₹2000 bet will win you ₹2000 making it 100% market. So, regardless of which way the coin falls, the bookie will not make a profit.
However, no betting company is interested in providing the true probability of an event. Rather, betting companies price markets to surpass 100% in order to create an edge that favors them. Usually, the deviation of the price you get from the true odds is known as the bookmaker’s margin.
Going back to the coin toss example, a bookie would offer 1.9 odds for either heads or tails instead of 2, which means you have to bet more than ₹2000 to win ₹2000. Now, whichever way the bet goes, the betting company will pay out ₹1900 making ₹100 on the bet. So, regardless of the outcome, the bookie is guaranteed a ₹100 for every ₹2000 wagered.
With that in mind, the aim of the bookmaker is to bring in the most diverse bets at different odds as possible to make sure they earn a profit regardless of the outcomes of the event. Also, the odds can change depending on the amount you place on each option. As well, the betting company can lay off bets if their liability surpasses an acceptable level of risk. Often head to head sports markets tend to have low margins between 2% and 5% although they can be as high as 20% or more in exotic markets.
Odds compiler roles
Odd compilers play an essential role for betting companies. The odds they set determine how many wagers a bookie is likely to accept and the amount of money they will make. Odds compilers set the odds in a process referred to as pricing the market. When pricing the market, there are various factors that influence the markets for sporting events.
The aim is to ensure the odds accurately reflect the likelihood of any specific outcome while ensuring the bookie has a built-in profit margin. To establish the likelihood of an outcome, odds compilers rely on statistics although in some sports a certain knowledge of sports is applied. As a result, odds compilers must be very knowledgeable about the sports they price their markets on. For this, they specialize in one or two events and have a strong understanding of several statistical and mathematical models.
Here is an example of how odds compilers may price a market for a tennis betting that features Andy Murray and Novak Djokovic. The two players are very similar in terms of their ability. Thus, a compiler will have to consider several factors. These include the current form of each player as well as their respective abilities on the relevant court surface. As well, they would have to consider the outcomes of previous meetings.
Using these factors, the odds compilers may conclude that Djokovic has a 60% chance of winning compared to Murray’s 40%. The odds for Djokovics are approximately 1.67 while the odds for Murray are 2.50. Keep in mind that these odds do not include any margin which has to be taken into account.
Usually, odds compilers have a target margin in place. The margins may vary for a number of reasons. However, in this case, you can assume the compiler has a 5% margin. This calls for a reduction of each player’s odds by 5%. Eventually, the odds for Djokovic would decrease to 1.58 and 2.38 for Murray. To calculate the bookie’s margin, you have to add the reciprocal of the odds to get the possible outcomes and then convert it to a percentage. In this case, the following equation would suffice:
Margin = 1/1.58 +(1/2.38) = 1.05 = 105%
It is evident the odds compiler has hit the 5% margin target. But the job is far from over since the bookmaker has to balance the book.
Having a balanced Book
Provided a bookmaker manages to balance the book on a specific market, chances are they will make roughly the same amount of money despite the outcome of the event. In case the bookmaker’s book is imbalanced the outcome will affect how much they make and can lead to a loss. Always, betting companies prefer to have balanced books for obvious reasons. Thus, odds compilers aim for that.
Using the tennis match between Djokovic and Murray, a balanced book would require 60% of gamblers to bet on Djokovic and the rest on Murray winning. Suppose, the bookmaker takes ₹10,000 at 1.58 odds for Djokovic and 2.38 for Murray. Regardless of the outcome, the bookmaker stands a chance of making approximately ₹500 with a 5% margin.
You may be wondering what would happen if the ₹10,000 was spread evenly between the two players? In such a case, the bookmaker will have an imbalanced book. They would make money if Djokovic wins and lose money if Murray wins. Bookies always try to avoid such a scenario.
Use of fluctuating Odds
That’s why you will notice odds on sports tend to fluctuate with time. Usually, odds compilers constantly adjust the odds to ensure their books are balanced. For instance, in the case of Djokovic vs Murray, they may increase the odds on Djokovic to entice more gamblers to bet on his winning. Alternatively, they could decrease the odds on Murray as a way of discouraging gamblers from betting on his win. Also, the bookie can use both approaches.
Adjusting the odds may not always guarantee a balanced book. However, it usually helps. It explains why the volume of bets is essential to bookmakers. In other words, if a bookie has more money coming in, then they will likely get the book balanced. That said, it is quite rare to have markets that balance perfectly. So, the aim is to get as close to a balanced book as possible.
Nevertheless, sometimes odds compilers may actually want an imbalanced book. For example, if they are confident about a specific outcome, they may try creating a situation where they stand a chance of making the most profit in case of the outcome. Using the tennis match between Djokovic and Murray, if they are confident Djokovic will win the match, they may decide to push the odds on Murray to attract more action on that side of the book.
How Betting Companies make money balancing Books
Regardless of how hard a bookie tries, they are only able to balance their books if they can attract an equal proportion of bets. However, since betting relies on popular opinion it is not always possible to get the correct proportions by adjusting the odds lines. For example, an India-facing bookie will often be overexposed when it comes to bets on India in international events.
Suppose, India is playing Bangladesh in the final. It will be hard for the betting company in India to attract enough bets to be able to balance the book on their own without generating a large margin in India. If the betting company does this, gamblers would not bet on India and they may end up losing money to their competitors.
So, the betting company has a choice. They may take the risk that India will lose to make money. However, in the gambling industry, taking risks is the fastest way of going out of business. Therefore, whenever possible, bookies will lay their bets with other bookies through a mechanism akin to betting exchanges.
Using the example of an over-exposed India-facing bookie, then a Bangladesh-facing bookie will be over-exposed in Bangladesh. It means the India-facing bookie can lay its overall liability with the Bangladesh bookie and vice versa. This is the only way, both betting companies can make money regardless of the outcome without taking risks. To do this, these betting companies go through wholesale bookmakers whose function is to clear unbalanced books. The approach covers betting companies in 99% of cases.
Commission based earnings
The debate on whether poker is a chance or skill game is still raging. However, without going into the nitty-gritty, it suffices to say that a skilled poker player has an edge over a newcomer. So, to succeed in poker play, skill is very important. Of course, luck plays its role in determining your success but accuracy and skills will make you a profitable poker player over the long haul.
Both Binary Options and Poker share a lot of similarities. For instance, betting companies do not make money in these games through odds but from commissions for using the product. In both poker and binary options, you do not trade against the house but rather against another player. This is another reason why the house always wins.
ConclusionBetting companies have a mathematical edge over their customers. Even though they may not always win in every market, their advantage helps them make money in the long run. The mathematical edge is not the only reason betting companies make money. They also make money because of the fact that most gamblers place more bad bets than good ones. As a gambler, to beat the mathematical advantage, you must understand what makes a good bet.
Bookmakers make money by charging a commission on each bet you place. They also make money by managing the odds of the outcome of sporting events, as well as by winning over players who bet emotionally, which usually results in the player getting their bet wrong. They also offer promotions that grab the attention of less experienced players who play without knowledge or strategy and lose their money. So you should always bet with the help of tools such as statistics and other information to increase your chances of winning.