Have you ever wondered how sports betting companies make money, or tried to understand how they can promise millions of dollars in jackpots?
Well, here is an easy way to understand this concept. Betting sites accept tons of wagers each day from different people who expect different results. And often, at least half of these people end up disappointed.
For example, take a football betting market with outcomes 1 (home win), 2 (away win), and X (draw). Let’s assume that 40 people choose a home win, 40 choose an away win, and 20 select a draw. Then the match ends in a draw. 80 people will have lost their wagers, right?
Now, let’s assume that each person had wagered $10 on their bets. So, that will be a total wager pool of (100*$10=$1,000). Only 20 people win the wager, and assuming odds of 2.34 on the draw, the bookie pays out (2.34*$10=$234) and gets to remain with ($1,000 – $234 = $766)! That’s a lot of money. And that is in just one market!
Let’s consider some of the ways bookies make money and why they are willing to offer punters free bets and other offers which lure them to stake more cash:
They set the odds
Bookies are in the business of making money and must thus ensure that they keep doing so. However, they must also appeal to the target market by offering attractive odds that would push more people to place sizeable wagers.
They do this by creating odds based on statistical analyses that ensure they get to keep more money than they pay out. As a result, even if they end up paying out $1,000,000 weekly, they will have made a larger amount in the background, unbeknownst to the punters.
And because they get to set the odds, they always have an idea of how much they can expect from each betting market for each game, which helps them alter the profits to their advantage.
But how do they do this? They rely on odds compilers who:
- Set the odds based on the likelihood of the events using statistical data and sports knowledge,
- Balance the bookie’s books to ensure they have a margin (as explained below).
They charge margins
Did you know that bookies charge punters a fee when taking their bets? It’s a commission embedded in each wager, yet most punters are unaware that such a charge exists. But how does it work? Let’s assume a situation where the probability is 0.5 for each outcome, like that of tossing a coin. In ideal conditions, the coin will not land on its side and instead land on heads or tails. As such, the odds in such a case would be even. The bet would have 2.00 decimal odds. In moneyline, this would be +100, and in a fractional sense, this would amount to 1/1. If you placed $100 on heads or tails, the probable payout would be $200. But is this the case?
Not at all. Why is this the case? If you put some math to it, you realize that the bookie would end up at a disadvantage. For example, if 50 people placed $100 each on heads and another 50 placed $100 on tails, the bookie would end up with $0. That’s because the money from the losing wagers would compensate the punters who made winning wagers. That is unlike our example at the start of this article.
A bookie must thus figure out how to insure themselves against losses by incorporating a commission. Thus, instead of offering decimal odds of 2.00 on heads and tails, they would offer odds like 1.90. This way, they would still make money regardless of the outcome. We use the same example again – 50 people place $100 on heads, and another 50 do the same for tails. The wager pool would thus have (100 people * $100 = $10,000). If heads won, the payout would be (1.90*$100*50 people= $9,500), and the money accrued from the bets would be ($10,000-$9,500 = $500). This way, the bookie would be making a profit either way.
Of course, when dealing with sports markets where two equally probable events are unlikely, the math gets a bit more complex. But you get the gist, which brings us back to our first point of setting odds using analysis.
Do you want to know how else bookies make money? They count on punters to make bad bets, e.g., based on hunches, placed to chase losses, out of sheer greed, etc. Anytime punters make a bad choice, they add to the wager pool, maximizing the bookies’ profits.
Exercise more caution in your next bet – good luck!
