Bookmakers play a critical role in the sports betting sector, whether on the track or on the high street, or even online. They create odds, take bets, and payout on wins by enabling betting. But how do bookies make money? We look at the bookmaker’s business model to see how they operate.
What is a bookmaker?
A bookmaker is a commercial company that takes bets on sports events and other unusual markets such as politics and TV Specials at set odds. The bookmaker’s selection of betting options is determined by the jurisdiction in which it is located.
What do they do?
Betting companies provide odds on sports and horse racing events with a built-in profit margin. The goal is to offer a variety of wagers at various odds in order to ensure a profit regardless of the event’s outcome. The profit margin represents the cost of providing this service. Betting exchanges operate slightly differently to bookmakers, they make money by taking bets and charging a commission on winning bets and losing bets.
Setting odds and creating a market:
Bookmakers will start by offering odds on sports events in which they have conducted prior research. These markets could include; Football / Soccer, Horse Racing, Cricket, Tennis and many more sports. The bookmaker’s job is to ensure that the book price represents an accurate reflection of the chance of winning for each competitor involved in the event being book made. They must set their book prices so that there is no advantage for either side from their book price other than the fact that bets are being taken against each competitor at different prices. Once they have determined how much profit can be made from a particular betting market, bookmakers will ensure that their book price is not too attractive compared to their competitors. This would allow other bookmakers to offer better prices, which would erode the bookmaker’s profit margins.
The concept of dutching
Dutching is a strategy whereby more than one outcome is bet on. For betting agencies, a dutching strategy involves covering all outcomes in a bid to reduce risk and make a profit. For example, if bookmaker A believes that Team 1 and Team 2 are both 50% likely to win a head to head match, then the bookmaker can create a market with these two teams by offering odds of $1.90 for both teams. Note the price represents a discount to the actual chances of winning, if a team is a 50% chance of winning, their price should be $2.00. The 10c difference is this example is the bookmakers’ margin. Bookmakers need to set margins to make a profit and reduce risk. For every dollar bet on this market, the bookmaker is effectively making 10c profit.
Bookmakers can also lay off their liability on a market with another betting agency. If the agency were to receive a lot more bets on Team A, they may decide to lay off those bets in order to reduce risk. If they price turns, e.g. goes out to $1.95, they may also book a small profit.
Why do bookmakers love multi bets?
Multi bets are the jewel in the crown for bookmakers because they increase their profit margins. Consider a 4-leg multi bet where every team in each of the 4 matches is considered a 50% chance of winning ($2.00). The bookmaker sets their market and includes their profit margin, so they have each team at odds of $1.90.
Now, look what happens to the price when we multiply $1.90 x 4-legs:
$1.90 x 1.90 x 1.90 x 1.90 = $13.03
If there were no bookmaker margin, the price would be $16 ($2 x $2 x $2 x $2)
Instead of a 10c profit margin, the bookmaker is now collecting a nearly $3 on the multi bet.
How to place a good bet:
The best bookmakers will offer the lowest commission rates for winning bets, reliable payment options, and fair odds that aren’t inflated or too short due to liability concerns. It is also advisable that you check what market prices are being offered by other bookmakers before placing any bets as this could help you identify whether you’re getting an attractive deal from your bookmaker or not. Another way of finding out if your bookie has low margins and reasonable prices is by checking forums such as Betfair help.
