How Do Bookmakers Make Money? What Methods Do They Use?

Bookmakers operate by accepting bets on all possible outcomes of an event in order to generate profits, irrespective of which outcome prevails. However, for this to be successful they incorporate a margin into the odds offered, and use various techniques to encourage bets on all outcomes of an event.

As a result, beating the bookmakers and generating a long-term profit is highly challenging. Nonetheless it remains lucrative for sharp bettors who can accurately predict sporting outcomes.


How Do Bookmakers Earn?

Bookmakers earn a profit by offering odds on different outcomes of an event and ensuring that the total amount of money wagered on all outcomes is greater than the amount they will have to pay out to the winners.

When a bookmaker sets odds, they try to reflect the true probability of each outcome. However, they also factor in their own profit margin, which is referred to as the “margin” in the UK and the “vig” or “juice” in the US. This margin ensures that the bookmaker will make a profit regardless of the outcome of the event.

The best way to understand their process is to use the example of a coin toss, which we all know has a 50% true probability of heads or a tails.

Coin Toss Example

To keep it simple let’s take the classic coin toss example: heads or tails. In reality the chance is 50% for both outcomes. Therefore the fair odds for both heads and tails is 2.0 (I’ll explain why in the next section).

However, the Bookmaker would aim to reduce those odds down to a lower value in order to gain an edge over the market. This is how they create their margin.

Let’s suppose the Bookmaker offers 1.98 for both heads and tails and accepts a £100 stake on heads and £100 stake on tails; a balanced book with £200 total stake. This situation is perfect for the Bookmaker as one of the following two outcomes occurs:

Outcome 1: Heads

-£98 loss (paid to bettors that bet on Heads)
+£100 win (received from bettors that bet on Tails)

Net Result = +£2 for the Bookmaker

Outcome 2: Tails

-£98 loss (paid to bettors that bet on Tails)
+£100 win (received from bettors that bet on Heads)

Net Result = +£2 for the Bookmaker

No matter what result, the bookmaker is +£2 profit. This exact same principle translates over to sports events, whereby the fair odds are reduced down in order to generate a margin.

This is the simplest representation of bookmaking — but it relies on balanced books to ensure that profit is absolutely guaranteed. I’ll get onto this later on.


How To Work Out The Bookmaker’s Margin

The key to working out a bookmaker’s margin is translating their odds into percentages, which are known as “implied probabilities”. Using the implied probabilities we’re able to easily calculate the bookmaker’s advantage, known as the “overround”.

In a completely fair market, the probabilities of all outcomes in an event would add up to exactly 100%. For example, 60:40 (60% +40% = 100%), for the two contestants of a tennis match. However, bookmakers typically set odds that imply probabilities that are less than the fair chance of each outcome, resulting in a total of more than 100%. The difference from the true 100% book is known as the overround.

To fully understand how and why this is the case, I’ll refer back to the coin toss example from the previous section, where the odds for each outcome were set to 1.98.

Implied Probability

The implied probability of any outcome is calculated using a simple formula: 1 / (decimal odds).

So for our coin toss example in the previous section the implied probability for both outcomes is calculated as follows:

1 / (decimal odds) = 1 / 1.98 = 0.50505 = 50.51%

We know that the true chance of getting Heads or Tails is 50%. However, the odds of 1.98 overrate the chance of either outcome (by 0.51%). This represents the advantage the bookmaker has gained on each outcome.

Note that if the implied probability of an outcome is significantly less than the true probability, the odds are considered good value. However, if the implied probability is significantly greater than the true probability, the odds are considered poor value, and the bettor may want to avoid the bet.

The Overround

Using the implied odds for all outcomes, we can easily calculate the overround, or “bookmaker edge”.  The overround is expressed as a percentage and is calculated by summing the implied probabilities of all outcomes and subtracting 100% from the result.

In our coin toss example, there are two outcomes of Heads and Tails to total up:

50.51% (for tails) + 50.51% (for heads) = 101.02%

Now we just need need to subtract 100% from the total:

101.02% - 100% = 1.02%

Therefore 1.02% is the overround in our example. That means for every 100 units bet, the bookmaker expects to make a profit of 1.02 units, or +1.02%.

Notice that if the true odds were offered on each outcome of the coin toss (where the odds are 2.0/Evens for both Heads and Tails), the total of all outcomes would be exactly 100.00%. This would mean the bookmaker has no advantage.

Understanding the overround is important for sports bettors because it helps them assess whether the odds offered by a bookmaker are reasonable or not. The higher the %, the worse the odds are.

The overround varies depending on the sport, market, and bookmaker, but it typically ranges between 5% and 20%. The good news is that in horse racing, and indeed many other sports, calculating the true probabilities is far more difficult than a simple coin toss. Therefore bookies don’t always get it right, and often set odds above the fair value. These are known as value bets.


Balancing The Books

In the context of bookmaking, “balancing the books” refers to the practice of adjusting the odds and managing the amount of bets taken on each possible outcome of an event so that the bookmaker’s liability is minimised. Essentially, it involves ensuring that the amount of money wagered on each possible outcome of an event is roughly equal so that the bookmaker is guaranteed to make a profit regardless of the outcome.

By offering more attractive odds on the less popular outcomes, bookmakers can increase the volume of bets and offset their risk from more popular outcomes. This is similar to a shop owner lowering the price of a product to increase sales. This attempts to avoid an imbalance in the books, which can lead to payouts that aren’t covered by money collected from other outcomes.

For example, if there is a large volume of bets on a particular horse due to a tipster’s recommendation, the bookmaker may decide to raise the odds of other horses in the race and slash the tipped horse’s odds.

Bookmakers may also limit the bet sizes on the heavily backed outcomes to prevent further exposure. However, this can upset regular punters who are accustomed to placing larger bets.

This process of balancing the books requires automation from the bookmaker’s side, as well as an understanding of the risks involved when taking on exposure to particular events or outcomes.


How Bookmakers Track Betting Exchanges

Betting exchanges such as Betfair have revolutionised the world of sports betting. This has meant that traditional bookmaking methods that involve predicting odds in-house are becoming less common and increasingly unnecessary.

The critical difference between bookmakers and exchanges is that bookmakers set the odds at their discretion and sell them to bettors, while exchanges provide a platform for users to trade odds with each other, allowing the market to form organically. Exchanges generate revenue by charging commission on winnings, rather than relying on an overround. Importantly, the odds on the betting exchange are representative of true probabilities, due to the collective wisdom of bettors actively trading on it. This means bookmakers no longer need to predict their odds: they can simply track the prices on the exchange.

This is precisely why bookmakers and exchanges are so well synchronised in their price movements. Modern day bookmakers utilise the public’s knowledge by following the odds on the exchange, and achieve their profit margin by setting odds sufficiently below the current lay price. This simple “price tracking” technique generates bookmakers a profit by eliminating guesswork and the need for complex predictive models while setting odds. If you ever visit a UK racecourse, you’ll notice the track bookmakers using this method.

However, there are some issues with price tracking the exchange, most notably the potential for arbitrage opportunities. In a volatile market, lay odds can fall below bookmaker odds, allowing bettors to make risk-free trades. This opportunity usually doesn’t last long, as bookmakers are quick to change their odds to remain below the exchange, thereby eliminating the arb.


Final Thoughts

It’s essential to remember that bookmakers are not omniscient and do not know the outcome of an event before it happens. They are simply experts in setting odds that are slightly lower than their perceived probability of occurring. This margin ensures that they make a profit over time, and it’s the cost of the service they provide to bettors.

Understanding how to calculate the overround using decimal odds is a critical skill for sports bettors as it helps to identify bookmaker markets with the lowest margins. These markets, in theory, offer the fairest odds, making it easier to generate long-term profits from sports betting.

However, finding markets with low overrounds alone is not enough. A successful bettor should prioritise finding good value. Betting on outcomes that are priced higher than their perceived probability of occurring can provide long-term profitability, even in markets with a high margin. Identifying value bets requires a combination of skill, knowledge, and discipline. You need to have a deep understanding of the sport you are betting on, analyse data and information to form your own opinions, and be disciplined enough to stick to your strategy over time.

Lastly, bare in mind that sports betting involves both luck and skill, and losing streaks (bad variance) can occur even when placing bets with good value. Therefore, it’s important to manage your bankroll and stick to a sound staking plan to ensure long-term profitability.

If you want to discover ways of beating the bookmakers, check out my Strategies section of this site, which includes matched betting, arbitrage and value betting.

Toby @ Punter2Pro
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