It is important to understand how bookmakers make money because it helps us understand what it takes to beat them. We also have a video about this topic, if you would rather watch a video, click here.
Let’s start with an example: A game between Manchester City and Manchester United on April 17th, 2017. As you can see, different bookmakers offer different odds on the same game.
The reason why this happens is that there are different opinions on what the probabilities are for either of the teams to win or lose.
Bookmakers make money by having a certain margin on each bet we (as bettors) place through their website. Their expected revenue equals their margin multiplied by the number of bets coming through their platform times the amount of money bet on each game.
In every single game bookmakers offer odds for, they make sure to have a mathematical edge against the player. And this margin is what enables them to make money. It is also seen in casinos, if this wasn’t the case, they wouldn’t have a very successful business model.
Essentially the bookmakers give themselves this mathematical edge, by offering lower odds than what they actually believe the real probabilities are. Here you have a clear example.
Odds are also another way to express probabilities. The odds are the inverse of probability. So 2 in odds equals a 50% probability of a certain outcome to occur. So, if we divide 1 (the total) by 2, you will get 0,5 or 50%.
There are many services out there that allow you to compare odds offered by different bookmakers, and the majority are free. Sticking to the same game, as you can notice, these two bookmakers have different odds on Home, Draw and Away.
They also have different Payout rates and different margins. Payout rates and margins express the same thing but on a different perspective. If you would like to learn more about concepts, please check out this article.
The bookmaker, in this case, the European bookmaker has a margin of 6.78%, meaning that out of every 100$ spent on this game, $92.22 are paid out to players, and the bookmaker keeps $6.78 for themselves.
On the other hand, the Asian bookmaker is offering in this case higher odds on the home team to win, higher odds for a draw and higher odds for the away team to win.
But the question is how can Asian bookmakers take such low margins compared to the European bookmakers? Asian bookmakers and European bookmakers just have different business models, nonetheless, in both cases, each bet placed in a bookmaker has a margin.
Now, this is multiplied by the turnover and this gives them the profit. So turnover can further be broken down into the number of bets times the number of bets.
A bookmaker makes profits by having certain margins on each game and independent of which outcomes the players bet on.
Now because the bookmakers keep this margin means is that in order for a player to be profitable in the long term, they need to have an edge against the house.
how do the bookmakers come up with these odds?
How do they decide that the odds or the probability of Manchester City to win is 54.05% and the probability of Manchester United to win is 23.81% and so on?
Some of the bookmakers calculate their odds in-house, so they have odds experts who look at a bunch of different factors and they come up with a number that they are comfortable with as the probability of this team winning.
Now how exactly they do calculate these probabilities that will differ depending on the company or the different odds experts as well.
Some of the factors they take into consideration could be the team's lineups, whether or not there is an injured player on the team, their position in the league table, how well have they been playing lately or their winning streak, losing streak and so on.
So the point with this is not to say exactly which factors and how they weight these factors in order to come up with these probabilities, it's just to point out that there are a lot of different ways to do it and these are some of the inputs that go into these models.
Now, because there are so many different ways and you can think of so many different factors that might have an impact on the teams.
Some examples are that the home team is more likely to win than the away team, past results, if the field is more slippery because it's raining and that might lead to more goals and so forth. All in all there are many possible factors and deciding exactly which of them have an impact and how much impact they have is really difficult.
The good thing nonetheless, it is that there are a lot of different opinions on how to calculate these probabilities, this is why you see that different bookmakers have different thoughts.
They have different opinions on what they believe the underlying probabilities are, but what they all have in common is that they will take a margin on the different outcomes of the games.
differences between the European bookmakers and the Asian bookmakers
As we saw in the example of Manchester city vs. Manchester United, the European bookmaker example had different odds to the Asian bookmakers and in general, had a lot lower payout rates or in other words a higher margin.
So basically what this boils down to is that the European and the Asian bookmakers operate with different business models.
One way to describe it would be to say that the European bookmakers our decision takers. They typically have in-house odds teams that analyze and believe that a certain team is going to win and that XX% is the probability of this team winning.
While the Asian bookmakers, on the other hand, are more booked balancers, so they just want to take in a very large amount of bets and a very large amount of money and then in order to reduce their liability.
For instance, if 1 million dollars is bet on Manchester City winning, they will hedge that out by either shifting their odds to attract more potential bettors to put money on Manchester United or they can lay off the beds at exchange or other bookmakers.
So let's say that both of these bookmakers want to make a 1 million dollar profit. Now because they operate with different business models and there are different ways of them achieving these 1 million dollars of profit.
For example, let’s compare the Asian bookmakers to a company selling soda and European bookmakers to companies selling whiskey. So if you're selling soda, you can sell 1 million of bottles of soda and only have a margin of $1 in each soda you sell and then you're making a million.
While if you're selling 30-year-old whiskey, let's say the margin on each bottle of whiskey is $100,000, then you need to sell only ten bottles in order to reach 1 million in profits.
In other words, the Asian bookmakers operate by having high and low margins but a higher turnover, while the European bookies operate by having a higher margin but they have lower turnover.
some of the differences between European bookmakers and the Asian bookmakers.
The European bookmakers have a higher margin but they have a lower turnover compared to the Asians.
The reason that the Asia bookmakers have this higher turnover is that they love sharp traders to bet through their platforms.
Now, to attract the sharp traders they also offer higher maximum stakes so the sharpest bettors in the world and betting syndicates will do all of their bets through the Asian bookmakers because the maximum stakes that European ones offer are too low for it to be feasible for them.
Even the best betting syndicates and professional sports bettors such as Jonas Gjelstad will only have low ROI per bet, so in order for them to make thousands in profits, they need to have a turnover in the hundreds of thousands, if they want to make a profit of millions, they need to have a turnover of 100 million, and if they want to have a profit of 100 million they need to have a turnover of billions and so it adds up.
Another difference between them is that the most common odds type at European bookmakers is the 1x2, so basically if the home, draw, and away. While in the Asian bookmakers, they typically remove the draw and use waters known as Asian handicaps.
So instead of the draw being a possibility, they will, for instance, give a team a plus-one handicap and they if it ends in a draw then that team with the plus-one handicap will still win.
Now, since the Asian bookmakers are almost purely market-driven, their odds will change much more frequently because as they're constantly trying to balance the books.
Suppose get in a large bet on one side. This will cause the odds to drop and then it goes up on the other side just like a lever.
In these markets you have all these sharp traders which are constantly looking for value in the market. If they believe that the Manchester City win is currently undervalued, they'll place bets on that line forcing it to drop and so the odds on Manchester United win will increase. Here you can see an example graph of what this looks like from a cup game between Chelsea and Manchester City.
Now, there might be a different sharp trader out there with a different model. According to their model, the Manchester United is now the undervalued team so they'll place bets on Manchester United to win and so the odds on United will drop and the odds on city will increase.
This will keep going all the way until the game starts and then finally which sort of an equilibrium where everyone's happy with the current prices and this is when we say that the market is efficient. Read more about the efficiency in sports betting markets.
This is also why we say that markets are more efficient closer to kick up than they are early on because at this point in time where money will have moved through the market so you could view it as money = information.
In the Asian market it can take ten thousand dollars or more to move the odds from 2.0 to 1.99 depending on the league. People who wager that amount of money and don’t know what they are doing, won’t last long before they go broke. Only the sharp players will remain over time.
What you'll also see is that these different forms of running bookmaker and they cater to different customers.
European bookmakers are into a larger degree targeting the average Joe that just wants to place a bet on his favorite team to win this weekend and doesn't think very much about the odds that they're getting offered.
This means that the bookmakers can get away with charging odds with a high margin, that are poor value for the players, while the sharp traders or bettors would be a lot more price sensitive so they will only bet when they get really good odds and they believe that there is value in this odds.
Another way that the European bookmakers have made sure that they don't attract the shark bettors is because the limits they have on the different games are a lot lower than all the Asian bookmakers.
On the Asian bookmakers on a Premier League game you know you'll be able to place a maximum bet of several thousand dollars up to $100,000.
At one of the European bookmakers the maximum bet might just be a hundred to a thousand dollars, and if a better proves to be profitable in the long term, the European bookmakers will also target these players and limit them by only allowing them to bet very small amounts.
Now, as we mentioned earlier because if you want to make a profit in the thousands you need turnover in the tens of thousands to the hundreds of thousands and if you're only allowed to place, for example, five dollars on a game, you're going to need a very high volume of bets in order to get there so it becomes very unattractive for the sharp bettors.
The main takeaway from this article is that in order to beat the bookies and be profitable, you have to identify when their odds is miss-priced compared to the underlying probability, what we call a value bet. And this value bet has to be large enough to overcome the bookmakers margin. Luckily, the Trademate Sports software does all of this for you automatically. So the only thing you have to worry about is to place the trades.