Although it’s not very often that you will pay attention to them, margins are everywhere in everyday life. If you walk into any retail store, or even go online to do your shopping, the price that you pay for an item will include a profit margin.
The same thing happens at an online sportsbook when you are looking for the biggest odds to win today on something like the latest Premier League action. This selection still has a bookmaker’s profit margin worked into them.
These hidden margins may be largely inconsequential for the occasional purchase and wager. If you need bread, for example, you are going to buy bread without worrying how much profit the store is making. If you want to place a bet on the World Cup winner, the bookmaker’s margin isn’t likely to stop you from placing the bet.
Here we look at how online sportsbooks set their margins compared to retail.
What is a retail margin?
A retail margin is quite simply the difference between the cost that a retailer purchases an item for and how much they sell it for. If, for example, they purchased a box of 100 hats for £100 and then sold those hats for £3 each, that’s a 66.6% profit margin on each item (buying for £1, selling for £3).
Retailers purchase at low cost by wholesale prices and then sell them at higher retailer prices. The interesting thing is that there is no rule about how much profit margin can be added to an item. It could be 50%, 200% or even 500%. But things like competition with other stores keep prices in relative check.
What Is a bookmaker margin?
A bookmaker margin is a little different and relies on far more complex systems. Much like the retail margin, the bookmaker margin, also known as the juice, the vig, the overround or the bookies’ edge, is a profit line that the sportsbook works into a market.
The margin is based on implied probability. Implied probability is what chance an outcome has of happening, according to the bookmaker. That’s then converted to odds. An example is that 2.5 decimal odds represent a 40% probability, while 1.67 odds represent a 60% probability.
Bookmaker odds on the Match Result market for a football match, for example, never tally up to 100% implied odds. With a win-draw-win option, it’s not something like 60%-15%-25% implied probability, it will be something like 66%-19%-23% which equals 108%.
That extra markup of 8% is the bookmaker’s profit margin, so regardless of the outcome, there will be some gain for the sportsbook. By moving a favourite from a 60% probability to a 66% implied probability, the odds are shortened, so the bookmaker pays out less by not giving punters “true” value.
Overheads
Part of the reason for margins is not just pure profit to put in the bank account and move on. Both retailers and online sportsbooks have massive overheads that margins help to cover. Things like staff, power, insurance, marketing and web design are all part of the cost of running businesses, and so companies have to make money from their transactions, so margins are a tool for doing just that.
Risk and reward
Bookmakers have a way of managing risk by tinkering with the odds. For example, if there has been a large volume of bets for a home win in a match, the bookmaker will shorten the odds of that option to make it less appealing.
By lengthening the odds of the other outcomes, it makes those more appealing and the hope is that bettors will start backing those instead, something which is likely to increase the profit on the market for the bookmaker. Sportsbooks legitimately reduce their exposure on markets all the time by doing this.
That’s very different from the risk that retailers put up. That comes instead from the cost of holding stock that takes a long time to sell or doesn’t at all. The prices in a retail store are fairly static from one day to the next. Promotions and coupons will affect them, but the day-to-day prices aren’t going to fluctuate like betting odds are.
Should you pay attention to bookmaker margins?
Margins are part of the experience of betting. It’s important to know how odds work and what they represent for the perceived value of the wager being made. More realistically, bettors simply look at odds comparisons to find the best possible odds for their particular selection, rather than worrying about bookie margins. If an option is 2.20 at one bookmaker and 2.25 at another, they will take bigger odds at the second bookmaker, irrespective of the margins.
