There are several differences between wagers with friends and family and wagers with a betting company. One of the most important is that all betting companies, bookmakers and exchanges, need to make a profit. If they fail to do so they will not stay long in existence. Furthermore all of these companies have considerable expenses that need to be covered before they can even start to make any money.

So how do they do it? The short answer is that they try to include a margin in every bet you make. They do this by offering slightly shorter odds than the expected probability of each betting outcome, as estimated by the bookmaker’s trader.

The above is true for all markets except promotional markets, where bookmakers sometimes offer odds with no margin, but small wagering limits.

The margin they apply will differ from sport to sport and market to market. A good rule of thumb is that the more turnover-intensive the betting proposition, the smaller the margin. This is partly because the bookmakers will generate greater turnover and should be able to make good profits even with smaller margins; partly because the larger betting propositions tend to be easier to assess and assign winning probabilities for; partly because the greater turnover tends to sharpen the odds (i.e. make them more accurate); and partly because competition between different betting companies for the turnover intensive betting markets is so intense that it has a tendency to drive the margins down.

The margin they apply will differ from sport to sport and market to market. A good rule of thumb is that the more turnover-intensive the betting proposition, the smaller the margin.                                                                     

Another rule of thumb is that the more possible outcomes a market has, the larger the margin will be. This is partly because many think it is harder to assess the probabilities of the different outcomes, partly because the consequences of making mistakes can be more severe for the bookmaker for markets where there are many possible betting outcomes and partly because the increased margin will be harder to notice for a novice punter.

The margins the bookmakers apply to different markets are easily calculated. I will show how this is done using a Premier League match between Leicester and Bournemouth as an example.

Pinnacle offered the following odds:

Leicester 1.68

Draw 4.03

Bournemouth 5.40

Remember, odds in the decimal notation are just the inverse of the percentage value for the probability of an outcome. So as Pinnacle has priced Leicester at 1.68 this means that the chance of Leicester winning would need to be 59.524%, in order for punters betting at such odds to break even in the long term. 

100/1.68 = 59.524

Punters betting on the draw would need the likelihood of that result to be 24.814% to break even in the long run. 

100/4.03 = 24.814

Punters betting on Bournemouth would need them to have an 18.519% chance of winning to break even in the long run. 

100/5.40 = 18.519

As we add these percentages up, it becomes clear that Pinnacle has applied some margin to their odds as the total is in excess of 100%. 

59.524 + 24.814 + 18.519 = 102.857

The above means that if you were to wager proportionally on all three outcomes, you would need a total wager of 102.857 EUR to recoup 100 EUR. This is easily demonstrated: 

59.524 EUR * 1.68 = 100 EUR

24.814 EUR * 4.03 = 100 EUR

18.519 EUR * 5.40 = 100 EUR

As you need to bet 102.857 to get back 100, the theoretical payback percentage in Pinnacle’s odds is 97.22%. 

100/102.857 = 97.22

If you were to randomly bet singles, in the long run you should expect to lose approximately the margin the bookmaker has applied when calculating his odds.

Simple calculations like the ones above are rather boring. Conveniently they are also completely unnecessary as there are many margin calculators available online. 

In this day and age, it is something of an urban myth that bookmakers work hard to make sure they will profit regardless of the outcomes of the different betting markets.

An important point often missed by novice punters is that bookmakers are unlikely to spread their margin equally across all the different outcomes. In short bookmakers are more likely to assign more of the margin on higher odds than lower odds. This is one of the causes of the favourite-longshot bias, a phenomenon where punters tends to undervalue favourites and overvalue underdogs.

The terms bookmaking and bookmaker originates from the practice – employed some centuries ago – of recording wagers in a hard-bound ledger. The bookmaker would write down the different bets to ‘make the book’. If the bookmaker is able to balance the wagers proportionally according to the odds, he will be guaranteed to make a similar profit regardless of the outcome of the event. 

In this day and age, it is something of an urban myth that bookmakers work hard to make sure they will profit regardless of the outcomes of the different betting markets.

Although none of the bookmakers I have worked for were fond of an overly unbalanced book, not a single one was actually trying to perfectly balance the book. No odds compiler, trader or risk manager I know is aiming for this. They are happy to take a bit of a risk. They are trying to achieve three things:

1) Make sure that no odds offer value to customers                                                                                                                                                                                                             

If odds offer value, the chance of that outcome happening is greater than the odds reflect. There are some exceptions to this. One example is if the bookmaker has a very unbalanced book and/or the bookmaker disagrees substantially with the market.

An example of this is the bout between Mayweather and McGregor in 2017. I know that many bookmakers were offering what their compilers/traders felt was a value proposition for Mayweather, simply because their book was very lopsided as most recreational punters were piling on McGregor and there was not enough non-recreational turnover coming in. As a general rule bookmakers are trying to avoid offering value propositions.  

2) Avoid offering odds that are completely out of line with the market                                                                                                                                                                                    

Odds completely out of line with the market will often present an arbitrage opportunity, allowing a punter to bet proportionally on all the possible outcomes with different betting companies, thus guaranteeing a profit. Most betting companies strongly dislike arbitrage punters and will try to limit the betting possibilities available to them.

Some betting companies are exceptions to this rule and are perfectly content with arbitrage punters. The reason why some betting companies are happy with arbitrage punters is because they are confident that they have sharper prices than their competitors, and will likely profit in the long term even from arbitrage punters.    

3) Control and limit the risk the bookmaker assumes for any one outcome                                                                                                                                                                 

Risk is fine, but there are limits to how much risk should be accepted for any one outcome. 

Even if most bookmakers are content to take on some risk, this does not mean that they will not use the incoming bets to move the odds and lines.

On the contrary, many bookmakers today have automated risk management systems that adjust the odds and lines automatically as bets are accepted. This is not just an attempt to balance the books, but also an attempt to not offer value propositions. A very unbalanced book can in some cases, (but not necessarily) serve as an indication that the bookmaker is offering a value betting proposition.

Many of these automated risk management systems will also take into account which customer(s) are placing bets on each outcome. All bookmakers have access to the betting record of each of their customers. These betting records can be used to work out which customers know what they are doing, in general and/or with a particular sport or league. The bookmakers would be foolish not to make use of this information. The smart bookmakers will actively use customers who have shown that that they are able to identify value for adjusting odds and lines. 

Much of what the bookmakers are doing is nothing more than the old stock market adage of buying low and selling high. This may seem strange, as at first glance it appears that the bookmakers are only selling. In fact, every time a bookmaker accepts a bet, they are in effect making a wager for the opposite betting outcome to happen. This is true for all bets a bookmaker offers, but it is best illustrated in a two-way market like an Asian handicap.

Assume that a bookmaker offers an Asian handicap of -1.5 for a Premier League match at Old Trafford between Manchester United and Crystal Palace. Manchester United -1.5 is priced up at 1.909 and Crystal Palace +1.5 is priced up at 2.00. If a customer wagers 1000 EUR at 1.909 for Manchester United, this is just the same as betting 909 EUR at odds of 2.1 for Crystal Palace +1.5 for the bookmaker who accepts this wager.

The bookmaker takes the opposite side of the customer’s bet. So, if the customer is betting 1000 EUR to win 909 EUR for something to happen, the bookmaker is betting 909 EUR to win 1000 EUR for the customer’s bet to lose. As decimal odds is (stake + potential profit)/stake, the bookmaker’s odds that the customer’s bet will lose is 2.1. 

Stake 909 EUR + Potential profit 1000 EUR = 1909 EUR

1909 EUR/909 EUR = 2.1

When the bookmaker accepts a bet for Manchester United at 1.909, this is akin to placing a bet for Crystal Palace at 2.1. In other words, the bookmaker sells Crystal Palace at 2.00 and buys Crystal Palace at 2.10. By the same logic he sells Manchester United at 1.909 and buys at 2.00.

As bookmakers put some margin into any market they offer, they are consistently in a position to buy low and sell high. This makes it easy for any properly-run bookmaker to produce a gross (before expenses) profit from their betting turnover.