I’ve written some posts lately about how some sportsbooks are market makers, while others just copy lines from other books.
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.
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.
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:
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.
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.
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…
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.
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.
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.
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.
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.
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.
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.
It’s probably clear that this explanation of the sportsbook business models is vastly oversimplified.
These insights into the complexities of the sportsbook business are integral to winning more money.