How similar are margins in online sports platforms and retail?
A common term thrown around when talking about the retail industry is “margins”, which is something that all companies live or fall by.
In simple terms, margins are the financial balancing act of how much to sell something for compared to how much it initially cost to purchase. The obvious goal is for the former to be greater to clear as much profit as possible. For online sports betting operators, margins are also crucial to the running of a successful business, even though such a platform is selling a service and not physical products. The principle of margins is just the same, as it’s all about the profit, and in sports betting, there is something specifically called the “bookmaker margin” which plays a part in the operator securing an edge.
Shared Goals
Retail and bookmaking are obviously two very different worlds, but they both have a fundamental reliance on managing profit margins. Margins have to be accurately calculated to work and aren’t just arbitrary. Every item of retail that is sold online or in a physical location comes with a profit margin built in.
A very simple model is that a store buys a pencil for 0.10 and sells for 0.50 giving themselves a 0.40 profit margin on every pencil sold. Bookmakers are not selling physical items, so their margins are worked into the odds that are on display. Just as savvy shoppers can find stores offering lower margins and better prices, punters can come across betting sites with lower margins and more generous odds compared to the rest. For instance, browsing a bookmakers list by Legalbet, an analytical service, bettors can find top-rated legal sportsbooks, selected by UK users and experts for their favourable odds, wide market coverage, and strong overall performance.
What is a Bookmaker Margin
Subscribe to TRBJust as no customer is ever going to see the profit margin a store has placed on a t-shirt, bookmakers’ margins are hidden within odds. On a coin flip, there is an even 50/50 chance of heads or tails every flip, which would equate to 2.00 odds (even money) where 1 unit of stake would return 2 units (1 profit plus 1 return of stake).
But the bookmaker will offer something like 1.90 odds per option instead, so if the flip comes up heads, even though the real probability is 50%, the bookmaker is paying out at less than that.
For every 1 unit of stake taken on the winning heads, they only pay out 0.90 and pocket 0.10. So instead of offering 100% probability on a 50/50 market, by pricing the options at 1.90 odds, that totals up to around 105%, with the extra 5% being the profit margin.
Comparison With Retailers
The bookmaker is essentially marking down the fair odds, which is their margin. In retail, a store will typically work in percentages for their margins as well, for example, a 5% margin on every loaf of bread sold. Either way, the extra percentage is the profit margin that’s built into the product/service, and it’s the management of these margins which defines how well businesses do.
Size Differences
Typically, bookmaker margins are quite small on individual events. Bookmakers can’t drive up ridiculously large margins, because it will just make the odds unattractive to bettors who in turn, will go and find better ones elsewhere. It is rare therefore, on major individual sporting events to see a bookmaker margin at more than 10% which is the poor-value cut off line for a lot of bettors.
But retail margins can be a lot bigger and that will simply depend on what the product is. There’s not great margins on things like everyday groceries for example, but that’s where the high volume of sales makes up for that.
Luxury goods, in contrast, typically have large margins. This again is because of balance, as there will be a lot fewer top-of-the-line video gaming systems sold in one day compared to loaves of bread. A lower volume of sales equates to greater margins. For instance, the margin in grocery shops is about 2-3%, but for luxury goods, it can be over 50%.
Risk Management
Some things that bookmakers don’t have to worry about, like retail stores do, are managing inventory, theft, and having items like perishable goods go to waste and simply end up costing them money.
But they face their challenges as well because bookmakers still face the risk of unpredictable outcomes, which will greatly affect their profit margins. They constantly have to alter their odds on a market which is time and cost-intensive for them to be accurate and to capitalise on the margins.
This is a very important balancing act that bookmakers play behind the scenes because they have to keep odds competitive and attractive to attract a high volume of bets.
