The Sportsbook Business Model and How They Make Money

The Sportsbooks Background

I’ve written some posts lately about how some sportsbooks are market makers, while others just copy lines from other books.

It’s an important distinction to make:
If your goal is to win at sports betting, you need to understand the nuts and bolts of how the marketplace works.

In this post, I got into more detail about the sportsbook business model and how sportsbooks make their money.

The Broad Overview of Sportsbook Business Models

I can’t get into insane amounts of detail about all the intricacies of how sportsbooks make money in a single blog post. If this post seems short and simple, it’s because I’ve tried to make this information easy to digest.

It’s impossible to win in the long run at sports betting if you don’t understand, at least in a broad way, how the sportsbooks’ business model works.

Here’s the truth, though – there isn’t just one sportsbook business model. Many sportsbooks are independent of each other and follow their own business models – most of which are similar but have little differences.

Please Note:
My goal isn’t to explain any specific sportsbook’s business model in detail. I’m more interested in covering the broad concepts behind the sportsbook business. If you understand those, you’ll have a better understanding of how the book makes decisions.

It’s probably obvious why that’s an important step in becoming a winning sports bettor.

Sportsbooks as Market Makers and Sportsbooks as Retailers

Sportsbooks’ business models generally fall into 2 categories:

  • Market makers
  • Retailers

Some sportsbooks, though, might have multiple divisions which operate differently. They might be market makers in the football niche and retailers in the baseball niche, for example.

I described how market makers work in a previous post, but you should remember a couple of things about market makers. The first is that they publish their lines before most sportsbooks. And the second is that they must have a lot of betting volume to make their business work.

With a market maker:
You’ll find fewer betting restrictions because they want to encourage volume. Such a sportsbook doesn’t mind winning bettors as long as they’re putting plenty of money into action. All the bettors doing business with them help them improve the accuracy of their betting lines.

Market makers also tend to have a lower hold percentage (or a lower “vig.) Again, it’s for the same reason – they want to encourage volume.

Retailers:
On the other hand, prefer to minimize risk. Their goal is to just sell their sports bets and take their profit, even if it’s relatively small compared to the profits a market maker sportsbook might generate. They’re more like Walmart.

Not only do they have more restrictions on betting, but they also try to run off winning sports bettors. And they want to increase their margins as much as possible by charging as much vig as they can get away.

More Details about Sportsbooks as Market Makers

One of the benefits of the market maker sportsbook model is that they don’t spend a lot of money advertising. Since they’re willing to take bets from anyone with few restrictions…

Word of mouth usually generates all the action they’ll ever need.

Also, confident sports bettors like higher betting limits – which you won’t find at retailer sportsbooks.

Once a customer gets used to doing business with a market maker, he tends to be loyal and will often play at that book for years. This is true for both recreational sports bettors and sharps (professional sports bettors – or long-term winners).

The disadvantage to this business model is that it requires an upfront investment in employees with the skills to set opening lines and to actually manage the marketplace. It’s a major investment. That’s why none of your local, neighborhood bookies are market makers. They’re all retailers.

Please Note:
It’s possible to make a big investment in the infrastructure you need and still fail. In other words, only the strong survive with this business model. It’s just too easy for a sportsbook with few betting restrictions to lose a lot of money.

You might think that sportsbooks are guaranteed to win because of the vig, but that isn’t true unless they get equal action on both sides.

That rarely happens.
Instead, the vig represents a margin of error, and if the actual error gets bigger than that margin, the book loses money. And the amount of volume required for this business model increases the tax load for the business.

Market making is a low-margin, high-volume business. It’s easy to fail with that kind of business.

More Details about Sportsbooks as Retailers

Sportsbooks acting as retailers focus on more traditional business issues. Since they’re not investing in the infrastructure required to effectively manage a marketplace, they can focus their expenditures on things like marketing. They’re also willing to work on lower volume and higher margins than market makers. In fact, they prefer it.

Where do they get their lines?

Sometimes they just copy lines from other books, but other times, they pay for a data feed. Retailers don’t really know how the line is determined. If a sports bettor has more information than the retailer, which sometimes happens, that bettor can sometimes get an edge over the retailer sportsbook.

Please Note:
The kind of inside information I’m talking about isn’t necessarily related to injuries or players, etc. It’s inside information about who bet what and how much at the market maker sportsbook. Serious sports bettors hear stuff like that through the grapevine more often than retailer sportsbook operators.

So, the trick to being profitable as a retailer sportsbook is to get as much volume as possible while still maintaining a higher vig than the market maker sportsbooks.

And these are the sportsbooks who enforce small betting limits from suspected sharps.

A market maker will just adjust their lines in accordance with a sharp sports bettor’s move. A retailer, on the other hand, will limit that sharp’s action. Also, retailers are less likely to move their lines based on action than market makers.

Comparing Most Sportsbooks to a Retail Store

Most sportsbooks, especially those operating online, are retailers.

Much of what I understand about these business models comes from Ed Miller’s excellent book, The Logic of Sports Betting. In that book, he explains these 2 business models, but he does more than that. He compares how a retail sportsbook operates to how a pawn shop might run their business if they did a lot of trading in gold. (They’re out there.) How would such a business know what the price of gold is?

They’re probably just visit Google periodically to check the price. Then they would buy gold at a price somewhat lower than that, and they’d sell gold at a price somewhat higher than that. They wouldn’t necessarily change their pricing based on how much business they’re doing that day.

In fact:
If such a shopkeeper did change his price based on what other customers did during the day, savvy customers might figure out what’s up and stay away from his shop. Even savvier customers would figure out how to wait around in the store and pay attention to how often people are buying and/or selling to figure out when it was appropriate to buy or sell gold to the shopkeeper.

Such a strategy with a sportsbook would be called arbitrage. That’s when someone Googles the price of gold (in the case of a sportsbook, a betting line) and then buys from someone with a favorable price elsewhere – again, in the case of a sportsbook, another line.

You’ll find plenty of blog posts about how this is one of the best strategies for making a profit at sports betting, but practically speaking, it’s tougher than you might think.

Conclusion

It’s probably clear that this explanation of the sportsbook business models is vastly oversimplified.

Please Note:
The vig is only a piece of the business model for both market makers and for retailers. My goal is to help you win more often at sports betting, and when I get a new insight from a book by someone as smart as Ed Miller, I like to share it with my readers.

.
These insights into the complexities of the sportsbook business are integral to winning more money.

PLACE YOUR BETS NOW!

Rex Hoffman / Author

Rex Hoffman is a passionate sports writer, with over five years of experience covering sports journalism in line with the Vegas betting landscape. His favorite subjects include football, basketball, and baseball. As a Las Vegas resident, he enjoys finding an edge against the local sportsbooks and aims to share his extensive knowledge with both beginners and experienced bettors. Rex also dabbles in horse racing wagering and enjoys typical casino fare like blackjack and poker in his spare time.

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