The phrase, ‘you never see a poor bookmaker’ is a bit of a misleading one.
If you’ve been paying any attention to the world of gambling in recent years, you’ll know that plenty of bookies have ended up going bust for one reason or another, which wouldn’t happen if they were making money hand over fist. The reality is that bookmakers can, of course, lose money. Though this mainly only happens when they’re not well run, which can cause trouble in all businesses. In reality, it isn’t the bets that cause bookmakers to go bust.
Most of the time, when a betting company has hit trouble, it is because of the overall costs of running the business rather than because of the fact that they’ve had to pay out on winning bets. If a bookmaker knows their stuff, the fact is that they will have balanced their books in order to ensure that they aren’t going to lose money.
Whilst they’ll sometimes have to take risky positions, mostly they are able to absorb losses if they know what they’re doing. That, of course, isn’t a given in any walk of life, let alone the world of betting.
Balancing The Books
Bookmakers lose countless numbers of bets every single day. Imagine watching a day’s horse racing and how many times the favourites win, for example. If the horse is the favourite, that means that huge amounts of people have placed bets on it, so seeing it cross the line in first is a sure-fire way to know that the bookies will have taken a beating. Bookmakers much prefer it when you bet on the long-odds horse or place an accumulator wager, given that those two things are much less likely to cost them money by coming in.
Accas with long odds do come in every now and then, of course, so that can end up costing bookies money too. They try to avoid this scenario by making sure that their books are balanced. Let us go back to that day watching horse racing and imagine that you’ve placed a £10 bet on a horse that is 100/1. The horse has won, meaning that you and a few hundred other people have been paid out big money. The good news for bookies is that there were thousands betting on the 7/2 favourite that lost, more than covering their payouts.
Bookmakers use the overround method of ensuring that they will always win in the long-run. Picture a horse race with three horses: Fasty McHorse, Speedy Horse and McSpeed Horse. For the purposes of this explanation, we’re going to imagine that the horses all have the same chances of winning the race, with their being such a small field, so they have a 33.33% chance of victory. A ‘fair’ bookmaker would price them all at 2/1, but if they were to do that then they wouldn’t be able to create an overround and fix in a profit.
As a result, they offer odds of 7/4 for each of the horses. A £10 bet on each outcome would mean that you’d staked £30 but the return that you’d get would be £27.50, regardless of which horse won the race. If a bookie has laid all three to the same amount of money then they would make 8.33% profit, or £2.50, on every £30 bet. In other words, a bookmaker that has been clever in the odds that they’d offered will be able to secure a profit no matter what the outcome of the event is, presuming that their books are balanced.
How do Bookies Make Profit?
The scenario above is obviously a dream one for bookmakers and one that very rarely comes about. It is incredibly difficult for them to balance their books perfectly, largely because most events don’t have competitors that are evenly balanced. When Liverpool play a team lower down in the Premier League, for example, there will be some people betting on the lesser team, like Everton, simply out of loyalty. This means that bookies will get some money placed on Liverpool not winning, but the vast majority of wagers will be on Liverpool’s success.
The consequence of this is that they stand to lose far more money if Liverpool win than if they lose. They are able to add a vigorish into the odds that they offer, but it is still difficult for them to definitely make a profit. They are able to make use of wholesale bookmakers and most betting companies can take insurance out against big losses, but a day of the favourites winning every race at a meeting or all of the best teams winning over the course of a Premier League weekend will still end up costing them some money in the short-term.
Whether it be the day that Frankie Dettori won all seven races at Ascot, Greece winning the European Championship or Liverpool’s victory in the Champions League in 2005, having been 3-0 down at half-time, there are occasions when the bookmakers can’t help but lose money. Of course, the reality is that they will make money in the long-run, even if they lose some in the short-term. When a long-odds winner happens, that means that plenty of people placing odds on short-odds options have lost and there are more of them.
Alex Donohue, who worked as the Football Public Relations Officer for Ladbrokes, had this to say about Leicester City winning the Premier League in 2015-2016:
“It’s a falsehood if any bookie says they have lost money overall on Leicester £3m is a record net payout for a title winner, but we did well out of Leicester upsetting the odds to get there. No complaints at all.”
In other words, the bookies ‘lost’ money to those that bet on Leicester, but gathered in the wagers of all of the other bettors to ensure that they made profit. Consider it akin to someone betting big on the roulette table, meaning that the House has to pay out, but they’re able to cover the payout and make a profit thanks to all of the other bets on the table.
What Costs Bookmakers Money?
That bookmakers are in a position to fix themselves a profit as far as the bets are concerned is not in question. Though poorly run bookmakers might sometimes suffer thanks to mis-priced odds, that doesn’t happen as often as punters would like and generally gets covered by the bets that are priced correctly anyway. In truth, the bets that they make and take are not where bookies lose enough money to mean that their business is ever under threat. Instead, it is often bad business practice that leads to a bookmaker’s downfall.
Whilst the biggest brands operating in the world of betting tend to have huge amounts of capital behind them and a solid amount of products on offer to punters, the same isn’t necessarily true of smaller betting companies. They are much more at risk of failure, not so much because of the betting side of things but because of how much it costs to run a business. Bookmakers that set up as independent operators have to ensure that they have a staff that can run their website, rent for the place that staff operate and the cost of licences to contend with.
If they have physical betting shops that you can go to, those costs go up even higher. If they want to bring in punters then they’ll need to spend money on advertising to appeal to people in the first place. After all, would you bet with a company that you’d never even heard of when the likes of Paddy Power or Coral are available and have better brand recognition? This is a problem for many new bookies, so they need to find ways to bring in people that want to place bets in order to make the profit that will cover all of these things.
There’s More Than One Reason For Failure
In the vast majority of cases, it will be a combination of things that leads to a betting company failing and losing money. Competition can be one of the biggest issues for smaller businesses, who will often try to bring customers in by offering loss-leading promotions. This is where they offer something that they know will result in them losing money, but they do it in the hope that it will bring in enough people to ensure that they make money over time. The issue is when the people that take advantage off the loss-leading promotions decide not to come back.
There is also the fact that newer companies are more likely to fall foul of the rules and regulations that are put in place by the United Kingdom Gambling Commission. When they do so, there is a chance that the regulator will issue them with a fine, which will see them lose the money paid for that as well as any other losses that they’ve had. The UKGC obviously doesn’t want any companies to fail, but ultimately their responsibility lies with ensuring that punters are protected, not that gambling businesses are making a profit.
When betting sites fail, it is rarely because of one single thing. Instead, it is likely to be because of a few different reasons, which can include losing money on bets. Imagine owning a betting company and seeing every favourite win during the Cheltenham Festival, prior to every favourite winning in the Premier League. Your profits have taken a hit, when you find out that you broke one of the Gambling Commission’s rules and need to pay a large fine. Your landlord has also decided to put up the price of rent, starting next week.
How would you deal with that? What would be your plan for coping with the financial losses that you were incurring during that period? The company might have some money put to one side, but the likelihood is that it will make more sense for you to shut the business down and mitigate your losses than to try to keep going. In essence, you’ll have done everything right but still seen your business fail, simply because of a confluence of circumstance that leaves you without as much money as you need to carry on.