Betting Guides

How Do Bookies Make Money? The Economics of Sports Betting

By Joe Curmi

Published: 12:12, 28 February 2024 | Updated: 12:46, 29 February 2024

A report in 2023 showed that around 5,500,000 people in the UK were active monthly at online betting sites. 

Sports betting continues to grow, and December 2023 had over 15,000,000 more bets placed on sports within the UK during the month than December 2022. 

Behind all that, bookmakers are making money by cutting into the books. 

The Basics of Bookmaking – How Bookies Make Money

Much of the history of betting is tied to the growth and popularity of horse racing in the UK from times past. Through the 1700s, racing betting was prominent. The state lottery came in during the 18th century, and despite plenty of efforts to quash and control betting, like banning off-course racing betting, it continued to thrive. 

In 2005, the Gambling Commission was established to control the gambling market. Due to the explosion of the internet, online betting sites started appearing more frequently from around 2000 onwards, and today, they are a packed space.

Computers replaced banks of analysts to allow betting sites to offer more and more markets to their customers, using real-time data analysis to update odds, drive live in-play betting and run features like live streams

Setting the Odds

A bookmaker primarily controls things through the odds that they set. While technology has changed how bookmakers offer them, the end goal behind setting odds has not changed – profit-making.

A bookmaker relies on computing power, statistics and mathematics to create odds. Analysts look for trends within giant data banks to determine where the odds should be set to open a market.

Once a bookmaker sees a lot of money on a heavy home favourite in a football match, they will shorten those odds and lengthen the underdog. That’s to make the underdog quote more appealing and send punters that way to avert further potential payouts on the home team.

So the concept of a ‘balanced book’ is just that, a concept, but not a practical reality. A balanced book, where the probability of all the odds in the market equals 100%, doesn’t happen in betting. It’s where a betting market starts, but the bookmaker must work for profit.

Odds are representations of probability. Even money means a 50% probability of an outcome happening. A quote of 2/1 is a 33.3% chance, 8/11 is a 57.9%, 4/6 is 60% and so on.

But 50/50 markets, such as who will win a cricket toss, aren’t 1/1 (50%) for both options. They may both, for example, be 10/11 for a 52.4% chance, which is logically impossible. Two 52.4% chances add up to 104.8%, but that is because of the overround.

Betting Overround

The bookmaker margin goes by many names. It is sometimes called the overround, the Juice, or the Vig. But it all means the same thing – it is the bookmaker’s profit margin on the market.

Let’s go back to a fair book of 100%. A bookmaker will first determine the probability of outcomes based on their data. For a football match, that could be:

Liverpool 60%

Draw 22%

Everton 18%

From there, the bookmaker will add their margin, so the final probability amounts that the customer would get converted to odds may be:

Liverpool 63.6%

Draw 23.8%

Everton 20%

That totals up to a 107% overround, or the profit margin. That means the bookie takes seven profit for every 100 staked on that book. It’s essentially balancing the books so no matter the outcome, they won’t face the liability of a loss.

Bookmaker’s Risk Management Strategies

Bookmakers have many risk management tools in place, like the overround. 

Another way bookmakers mitigate the risk of financial exposure is through bet limits. There are caps on how much a player can win from a single bet and caps on how much can be staked on one bet. 

Bookmakers use software to track how much is coming in and out every day. After a series of big losses, their automatic risk management software may start sliding out higher bookmaker margins and changing odds to make underdogs even more attractive prices.

It is all very calculated and precise, and the bookmaker, thanks to input from their traders, can essentially set whatever odds they want. It’s up to the punter whether they accept them or not.  

Betting Exchanges vs Traditional Bookmakers

Other betting platforms exist, like the age-old Tote pool betting system upon which betting exchanges are loosely based. In the 2000s, Betfair’s online betting exchange shook things up when it was launched, and it was something entirely new. 

Instead of fixed odds, punters bet against each other and assume liability on markets. Bettors have to match in markets. If someone wants to back Tottenham to win, it will need a ‘layer’ opposing victory for Spurs.

A betting exchange doesn’t act as the middleman by setting the odds. Therefore, the exchange makes money not off bookmaker margins but by charging a commission on winning bets.

At one point, it looked as if exchanges would shake up and threaten traditional betting platforms. But it never happened, and the two co-exist peacefully. Betfair even set up a fixed odds platform alongside their exchange.

While exchange betting is a much-vaunted and initially revolutionary way of betting, traditional betting far outweighs the volume of betting exchanges, and that’s because of an obvious advantage – accessibility. 

Fixed odds betting is simple, while betting exchanges can represent a steep learning curve for beginners.

Bookies Sign-Up Offers & Regular Promotions

It is not uncommon to see welcome bonus offers at online bookmakers. That’s because they are an incentive, giving new customers free bets for settling their first bet on the account.

This is a big tool in the bookmaker’s customer acquisition arsenal. Bonuses appeal to players, and while the operator assumes some risk of the new player winning with their free bets, there’s still a significant element of control.

Bonuses serve as a loss leader for a bookmaker, who knows that once the customer is all signed up and has already made a deposit to qualify for the bonus, they’ll probably stick around and gamble some more. 

Equally important to betting sites is retaining customers. Again, promotional offers play a significant role in this. Bonuses like Price Boosts, Money Back Specials and even Cashback on losses exist because they help customers feel like they are getting something when it’s a covert push to bet more.

Large Bets & High Rollers

High Rollers, the type of players that can lay stakes that dwarf the cumulative amount of 100 regular punters, are an exciting area for betting sites. The bookmaker will likely entertain them because a significant stake could equal a big payday if it loses.

Everything a bookmaker does entails risk management. While they may entertain a large stake, they will have their systems in place to prevent excessive financial exposure. One way is by laying off bets. This is when they will spread the risk by placing their own wagers on what would now be a hugely imbalanced market with other bookmakers.

Their bets would oppose the volatile large bet, so if they had to pay out on the High Roller wager, they would know that profit would be coming in to offset some of that payout. This is a common risk management practice among bookmakers and is entirely legal.