How do bookmakers make money
By understanding how bookmakers make money you can recognise when they are offering poor value compared to an exchange, helping you become more profitable.
A bookmaker is an organisation or person that sets and sells odds on future events
Bookmakers make money by accepting bets on a market and pricing it in a way that does not represent the true probability of the outcomes. This margin, or overround, gives them an edge over bettors.
Heads or tails?
A coin toss is a good way to explain bookmaker betting margins. The probability of landing on either side of the coin is 50%, meaning the odds should be priced at 2.0/2.0 on both sides. You bet £100 to win £100, making it a 100% market.
It is not in the interests of the bookmaker to offer the true probability of an event. Instead, they price markets to go above 100%, creating an edge in their favour. The deviation of the price offered from the ‘true odds’ is the bookmaker's margin.
For the coin toss, bookmakers would offer heads or tails at odds below 2.0, meaning you would have to bet more to win £100. If the odds offered were 1.91 - a margin of 4.7% - on average bettors would lose 5p for every pound spent over time.
The importance of calculating bookmaker margins
Because bookmakers don’t openly display the market overround in the same way an exchange does, it’s useful to be able to calculate betting margins.
Once you’re able to calculate these you can identify and understand the variation across bookmakers and how this can greatly impact your potential return.
Betting value relates to the market as a whole, meaning you need to consider the odds for all outcomes. The bigger the margin, the poorer the overall value for bettors.
Why an exchange offers more value
An exchange offers a truer picture of how much a bet is worth. But how?
On a betting exchange users bet against other users - eradicating the need for a bookmaker. The market is driven by supply and demand, often resulting in better odds compared to those of a bookmaker.
Instead of a bookmaker margin, exchanges charge commission on winning bets. Smarkets offer an industry-low 2% commission on net profits. This provides more value than other exchanges, who can charge upwards of 5%, while some users may have to pay a premium charge that can be as high as 60%.
The average bookmaker margin is 6%, which represents a significant difference in potential value for bettors, compared to betting with Smarkets.
Apply this to betting
By understanding how bookmakers make money, you can then calculate betting margins, which allows you to recognise who offers the best odds.
This is a vital tool in any bettor’s arsenal, as you now have the knowledge to compare odds across bookmakers and find the best value, ensuring an increase in your potential profit. Remember the best value is the fairest odds, which is what you get with Smarkets.