How Do Bookies Make Money? - Ultimate Guide (2018 Update)
In this article we’ll provide you with all the insight on exactly how bookmakers make their money. This includes backing and laying, balancing the book, basic odds compilation and overround. We’ll also explain how you can use this knowledge to become a more profitable and successful bettor.
How Do Bookmakers Make Money?
Most people will have heard some version of the phrase “you’ll never meet a poor bookie”. Many people also wonder “do bookies always win”. While it is difficult to ‘beat the bookies’ by consistently making a profit, it can be done.
In order to be successful, it is important to know the mathematics of bookmaking and recognise the techniques bookmakers use to ensure they are always at an advantage.
So, how much do bookies actually make? How exactly do they make their money? How do they stack the odds in their favour to make sure that they always stay ahead of the game?
Before we answer any of those questions, there are a number of concepts you must first understand.
Backing & Laying
There are two sides to any bet. Anyone familiar with Exchanges such as the Betfair Exchange will have seen the options to ‘back’ or ‘lay’ any particular outcome on a given event.
For a punter to back their predicted outcome, first they must find someone willing to take the opposing stance i.e. to lay the bet.
Betting Exchanges simply cut out the middleman (the bookie), allowing punters to back and lay directly against each other. The Exchange earns its money through taking a commission on every trade made between punters on its platform.
That gives a brief introduction to the concepts of backing and laying – the two fundamental sides to any bet. In the days before online Exchanges appeared, a traditional bookmaker was the best place to find someone to offer odds on an event – in other words to lay that particular outcome.
Balancing The Book
The actual term ‘bookmaker’ simply comes from the practice of laying bets and more specifically, the recording of these bets in a ledger or book, hence ‘making a book’.
When making a book, the bookie is simply laying each possible outcome of any given event in such a way that will guarantee them a profit no matter the outcome.
But how do they do that?
In very simple terms, the bookmaker achieves this by setting appropriate odds for every possible outcome and taking an appropriate amount of money on each outcome. These days, bookmakers have sophisticated technology to do all of this automatically. However, the underlying principles remain the same as they always have been.
The Bookies Business Model
To begin to understand the bookies’ business model, we first have to have a basic grasp of odds, how they’re set, and how they relate to the true probability of each outcome actually happening.
In a previous article where we explain the Gambler’s Fallacy, the example used to illustrate this was a coin toss. The coin toss will once again come in handy here, so let’s recap.
A coin toss has two possible outcomes – heads or tails. Each has an equal 50/50 chance of landing. This would be reflected in ‘true’ odds of Evens (2.00) for each outcome. When laying both outcomes at those odds, in order to balance their ledger, any bookie would have to take an equal amount of money on each outcome – let’s say £50 on each.
If heads, the bookie pays out £50 to the winning heads backer. However, this would be offset by the £50 the bookie makes by keeping the losing tails backer’s stake.
Breaking even like this would be, by definition, a pointless exercise for the bookie though, whose raison d’etre is to make a profit.
That brings us to the crux of this article; how do the bookies make their money and ensure they always remain profitable?
Basic Odds Compilation
Back to the coin toss, let’s consider how and why bookies arrive at the odds they do when laying such a bet.
Before anyone argues that you can’t place a bet on the toss of a coin – you can! Below is an illustration of how (from England’s third group game at the 2018 World Cup).
Here the bookie (bet365.com) is offering odds on which team will kick-off. How do we determine who kicks off? With a coin toss!
So for our purposes we shall say England is heads and Belgium tails.
The first thing you’ll notice are the odds. In this case they’re not Evens (2.00) which would be the true odds of either outcome. Instead odds of 10/11 (1.91) are being offered.
The question is, why the difference and what does it mean to us, the punter?
To answer that we have to look at the implied probability these odds indicate. 10/11 (1.91) gives an implied probability of 52.38%. Add together the probability of both outcomes and you get 104.76%.
The true odds of Evens (50%) would give a ‘perfect’ book on this market of 100%. However, as we discussed earlier, the break-even point of 100% is no good for a bookie to be profitable.
Slightly overestimating the probability of both heads and tails (in this case by 2.38% each) gives the bookie a profit margin of 4.76%. This means that if the bookie takes £50 on each outcome to balance its ledger, the payout on the winning bet will be 1.91 x £50 = £95.50.
Remember, the bookie has taken a total of £100 worth of stakes on the two outcomes and will pay out just £95.50 to the winner, no matter the result. In this way the bookie guarantees a profit of £4.50 on either outcome.
That is a very simple example with two possible outcomes. In football, even on a basic 1X2 market, there are 3 possible outcomes. In a horse race there could be as many possible outcomes as there are runners.
Overround, Vig & Juice
The same principle applies no matter how many outcomes are under consideration though. The important thing for the bookie is that adding the implied probability of the odds of each outcome gives a total figure higher than 100%.
Anything over 100% is the bookies’ profit. This is variously known as the bookies’ overround or the house edge. In America, it is known as vigorish (shortened to vig). It can also be colloquially known as ‘juice’ or a myriad of other terms. However, all are just shorthand to describe the bookies’ profit margin.
Now let’s take a look at a 1X2 market on a football match to expand on how the bookie applies an overround.
In this example, with odds quoted as a fraction, it’s easy to convert them into decimal odds to see the implied probabilities (if you’re struggling you can use our odds converter calculator).
- 1 (Home Win): 27/20 (fractional odds) = 2.35 (decimal odds) = 42.55% (implied probability)
- X (Draw): 23/10 = 3.30 = 30.30%
- 2 (Away Win): 23/10 = 3.40 = 29.41%
Adding the implied probability of all three possible outcomes (42.55 + 30.3 + 29.41) comes to 102.26%. This gives an overround of 2.26% thus guaranteeing the bookie a profit no matter the outcome.
That 2.26% may not seem like much, but consider that this is 2.26% on every single bet, everywhere. With the millions of pounds staked on hundreds of thousands of events every single day, you can see how this would soon mount up.
Maybe unsurprisingly, bookies aren’t happy to settle for just a 2.26% profit margin. So they have a few more tricks up their sleeves. Offering multiple selections is the most obvious and most common. So doubles, trebles and accumulators come into the equation.
If you calculate the overround on each selection, you will be able to decide whether you have a ‘value’ bet based on your own estimations of the market.
From the example above, you make your selection from the 1X2 options with a market overround of 2.26%. Add in a second selection to make a double and what happens? (We’ll keep the odds the same for simplicity). So, the bookie has another 2.26% overround or profit margin giving a total overround of 2.26 + 2.26 = 5.52%, thus compounding their profit margin.
On 3 selections (with the same odds) that becomes 2.26 + 2.26 +2.26 = 7.78%. This continues to compound as you add selections to your accumulator. So not only are the odds of your bet landing getting longer, the bookies’ profit margin keeps getting higher and higher as well.
Hopefully you can now see why the bookies love an accumulator and why most serious bettors steer well clear of multiple selections.
The concepts of backing and laying, odds compilation, implied probability and over-round or vig, are the fundamental building blocks that the bookies rely on to ensure that their profit is guaranteed, no matter the result.
However, if you can learn how to overcome these advantages, then you will have a greater chance at being a successful sports bettor and generating profit on a consistent basis.