How do bookmakers make money? The basic principles of betting
So how do bookmakers make money? This is how bookmaking works on a basic level: the bookmaker will accept money when a customer places a bet. This is known as ‘laying’ a bet. They will then pay money out whenever a punter successfully wins a wager. As all online bookmakers operate as businesses, it’s worth asking what does a bookmaker do? The idea is to take in more money than they have to pay out. Anyone can make and take a bet, but this is where the art of bookmaking really comes into its own. While bookies don’t have a say over the outcome of a sporting event, they do have a level of control over how much money they’ll win or lose based on what happens. This is what informs them when they set the betting odds.
When setting the odds for particular betting outcomes, bookmakers will include what’s known as a vigorish, or vig. This is also known as a juice, a margin or the overround, depending on where you are in the world. The vig is built into the odds that the bookie sets and displays to punters and works as an effective commission to guarantee that the bookmaker makes a profit on the bets that they are laying. This is why the odds offered on online bookmakers can never be said to be ‘true’: they’re always skewed slightly towards the bookie, which we’ll go on to explain in a little more detail below.
How do bookmakers make money? The vig explained
The best way of explaining the vig is resorting to the simplest form of betting: wagering which side a coin will land on when tossed. As we know, when you toss a coin, the chances of it landing on heads is 50%, and the chances of it landing on tails is also 50%. This is the case every time the coin is tossed, no matter how many times in a row it has landed on a particular side. In true odds, 50% converts to 1/1 in fractions and 2.00 in decimal odds. A successful $10 bet on heads will therefore return $20: a profit of $10 plus the stake of $10. If 50 punters place $10 on heads and 50 place $10 on tails, the bookmakers will bring in $1,000. But they’ll have to pay that same amount out regardless of the outcome, and in this instance, they will make no money.
But how do bookmakers make money ? Well, this is where the vig comes into play to, in theory at least, guarantee that the bookmaker can make money whatever happens in the bet. In the coin toss example, and in similar sporting bets between two well-matched opponents, the bookmaker won’t offer odds of 1/1 or 2.00. Instead, they’ll offer odds of 10/11, or 1.9091. A successful $10 bet on heads will now only return $19.09, which is $9.09 in profit and the $10 original stake. Now, imagine that we again have 50 punters betting on heads and 50 on tails. The bookmaker is still receiving $1,000 in total wagers, but whether the coin lands on heads or tails, they’ll only have to pay out $954.50, meaning they’ll make a profit of $45.50. This is the vig, and expressed as a percentage, it’s 4.5%.
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How do the bookies set their odds in sporting events to make money?
Hopefully, the above example has helped you to understand that notion of the vig, but in practice, making sure bookmakers can turn a consistent profit is a much more complex endeavour. This is why it’s worth asking ‘What does a bookmaker do?’ in order to find the answer to ‘How do bookmakers make money?’.
In most sports, such as football, two or more outcomes are possible, while in sports like horse racing, golf and athletics, there can be literally dozens of competitors for punters to wager – and win big – on. It’s also unlikely that similar amounts will be staked across all possible outcomes.
Most of the money, especially in horse racing, will usually go on the favourite or second favourite, for example. In order to ensure they make money, bookmakers will employ odds compilers, who will price up the market accordingly.
How do odds compilers help bookies make money?
As you may have guessed, odds compilers are responsible for setting the odds that bookmakers offer to their punters on a range of sporting markets, including for Asian handicap betting and 1X2 betting. In setting the odds, they need to bear two things in mind as the question of ‘How do bookmakers make money?’ will be hugely important. The first is that the odds must accurately reflect how likely the outcome occurring is. This is obviously important in convincing the punter to place a wager on that particular outcome. The second consideration is in determining how much money the bookmaker is likely to bring in – and how much they’re likely to pay out, thus calculating their overall profit margin. In order to calculate the odds, odds compilers need to have an eye for statistical detail as well as a comprehensive amount of sporting knowledge.
Let’s answer the question of ‘How do bookmakers make money?’ with an example. Assume that the odds compiler has been asked to price up a market for a baseball match between the New York Yankees and the Boston Red Sox. The two teams are both performing well in Major League Baseball and so punters will be expecting both to be offered at similar prices. The odds compiler looks at a number of factors, including who the home side is, form and player selection, before concluding that the Yankees have a 60% chance of winning and the Red Sox have a 40% chance of victory. In decimal odds, this converts to 1.67 and 2.50 respectively. Once a 5% vig is factored into the equation, it is now 1.59 for the Yankees and 2.38 for the Red Sox.
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How the odds compiler balances the books
We’ve hopefully answered the question of ‘How do bookmakers make money?’ by seeing how the odds compiler calculates the rough likelihood of each outcome occurring, but next, they must also try and make sure the bookmaker has a balanced book: this means they stand to make the same amount regardless of what happens. On the Yankees-Red Sox market, $100,000 total bets would equate to a $5,000 profit, courtesy of the 5% vig.
If this $100,000 was spread evenly between the two teams, the book is imbalanced; the bookmaker would have to pay out $19,000 more than they brought in if the outsider (Red Sox) wins. To avoid this, the bookie will try to encourage punters to bet on the Yankees by increasing their odds, or discourage further bets on the Red Sox by reducing theirs. If they’re very confident that the Yankees will win, they could push the odds on the Red Sox out even further to ensure they take more money on that side of the bet.
Let’s have a fact to answer ‘How do bookmakers make money?’. In the above example, imagine $60,000 is wagered on the Yankees at 1.59 and $40,000 is placed on the Red Sox at 2.38. Again, the bookmaker is taking in $100,000 in total bets. If the Yankees win, they’ll have to pay out $95,400. If the Red Sox are victorious, that figure will be $95,200. Either way, they’ll stand to make a profit.
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How do bookmakers make money on a market with more than two outcomes?
While a lot of sporting events have only two possible outcomes, many markets will have more than two for the punter to choose from. This is important if you want to know the answer to ‘How do bookmakers make money?. Because there are more selections to bet on, working out the odds and balancing the books is more complicated for the bookmaker. Let’s take a 1X2 bet, which is commonly used in football, to illustrate this. Imagine Chelsea are playing Everton in the English Premier League. The odds are as follows:
- 1 (Chelsea home win): 27/20
- X (draw): 23/10
- 2 (Everton away win): 11/5
The implied probabilities of each of these outcomes occurring are:
- 1: 42.6%
- X: 30.3%
- 2: 31.3%
Tallied up, the true odds will be 100% but here the implied probabilities add up to 104.2%, so we have an overround of 4.2%. This may not seem like a lot, but bear in mind that the overround, or the vig, applies to every single bet, so the money bookmakers make on these kinds of bets soon start to add up.
Making money through compounding
How do bookmakers make money when it comes to different bet types? Many punters choose to place doubles, trebles and accumulators on their sports bets, which may seem like they offer more competitive odds than single bets. However, bear in mind our vig on the above bet. In a five-fold accumulator, this figure is multiplied by five, giving the bookmaker a 21% overround on an acca which takes in five selections with similar odds.
Now, while punters will tend to wager a relatively small stake on accumulators, just bear in mind how many accumulators are placed on a daily basis. Bookmakers will have to take a hit every once in a while when an unlikely wager comes in, but the amount that they bring in from failed bets more than makes up for this.
Bookmakers also make money through bad betting choices by punters
We have to admit that punters help when it comes to answering the question of ‘How do bookmakers make money?’. The way that bookmakers set their odds helps them to generate a profit, but the primary reason that they make money is that people tend to place bad and/or misinformed bets. When it comes to sports, punters sometimes place a bet on the team they support, even if they are unlikely to win or if the bet is bad value.
As we’ve seen, accumulator betting, where the punter attempts to rack up significant returns from a relatively small stake by choosing several selections, also help the bookie, as on the vast majority of occasions the accumulator simply fails to come in. Cash out betting also helps the bookmaker, as gamblers can be tempted to settle their bets earlier and accept less money than they would have received had they seen it through to full-time.
How much do bookies make per year?
As well as asking ‘How do bookmakers make money?’, it’s worth thinking about how much they make. There’s no definitive answer to this question, as there are far too many variables. The amount a bookmaker can make in a year obviously depends on how many punters they have. A bookmaker with 50,000 active customers will, theoretically, have a much larger revenue than an operator who only has 500. However, a bookie with a large active customer base can still make a big loss on a bet, particularly if a solid favourite is heavily backed in an event with a large field, such as the Kentucky Derby or Grand National in horse racing. Of course, bookmakers, like any other business, are subject to business costs and taxes which also eat into their profit margins.
While this guide has helped you understand the answer to ‘How dobookmakers make money?’, it’s almost impossible to give an estimate as to exactly how much they bring in, as this will be different between companies.
Did you know?
In years gone by, bookmakers worked out the odds for specific betting outcomes – and thus how much money they were likely to make in any given situation – by hand. Computer technology now does much of the legwork in terms of statistical analysis, but it’s still important that bookies have in-depth levels of sporting knowledge to draw upon.
Conclusion: How do bookmakers make money?
Hopefully, this guide has clarified why bookmakers have a mathematical advantage when it comes to bets placed by customers. We’ve hopefully answered the questions of ‘What does a bookmaker do?’ and ‘How do bookmakers make money?’. Over the long run, the measures they put in place ensure that they make more money than they lose. While the vig and odds compilers are important reasons why bookmakers make money, punters making bad bets is also helpful for them. Many gamblers will just attempt to predict what might happen in a sporting event, without taking into account the value of the odds they are being offered and why. To make money on sports betting, you should work to identify good value betting opportunities rather than simply trying to predict what might happen.
Now that you know the answer to ‘How do bookmakers make money?’ , you’ll want to put down a good bet. At Wetten.com, we’ll help you find bookmakers that offer punters fair odds on a varied range of sporting markets and events, among them football, American football, basketball, baseball, tennis, golf, ice hockey, horse racing, cricket, athletics, rugby and much, much more! These are all among Canada’s premier bookmakers and all you need to do to start betting is to sign up and register for a free account. Once you’ve done so, you’ll find that you can quickly and easily deposit your funds and begin your gambling adventure. We hope you’ve found this guide – and our others – helpful, but if you have any further questions beyond ‘How do bookmakers make money?’, we’ll be sure to help you out.
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