How Do Sportsbooks Make Money? Understanding the Business Model

How Do Sportsbooks Make Money?

Sportsbooks generate substantial revenue, which benefits states like Arizona that have legalized sports betting. Essentially, the more money sportsbooks earn, the more tax revenue the state collects. This raises the question: how do sportsbooks actually profit?

There are several misconceptions about this. Some think sportsbooks only profit when favorites lose, while others understand that sportsbooks are designed to ensure profitability, though the specifics might be unclear. This guide will clarify how sportsbooks operate and make money.

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How Do Sportsbooks Generate Profit?

Sportsbooks are businesses with profit as a primary goal. They ensure profitability by managing risk effectively in an inherently risky industry. Rather than relying on unpredictable outcomes, sportsbooks control their earnings through the odds they set. They include a commission in the odds calculation to guarantee a profit.

For instance, in a fair coin toss with a 50/50 chance of heads or tails, the odds would ideally be +100. However, sportsbooks adjust the odds to include their commission, offering around -110 instead. This means a bettor needs to risk $110 to win $100 at -110 odds, rather than $100 to win $100 at +100 odds.

If two people each bet $110 on opposite sides of the coin toss, the sportsbook takes in $220. Since only one bet wins, the sportsbook pays out $210 (the $110 wager plus $100 winnings) and keeps $10 as commission, known as the vig.

What is the Vig?

The vig, short for vigorish, is the commission or fee that sportsbooks charge on bets. It’s embedded in the betting odds, so you don’t pay it separately. It’s also known by other names such as juice, commission, cut, or house edge.

For example, on odds of -110 for point spreads and game totals, you need to bet $110 to win $100, illustrating the vig. If you bet on the DraftKings Arizona app:

Arizona Cardinals -3.5 (-110)
Kansas City Chiefs +3.5 (-110)

The vig is evident here as you need to wager $110 to win $100, with the sportsbook taking a $10 commission.

For moneyline bets, odds are less balanced, requiring you to calculate the vig yourself. Use this formula:

$Odds+100×100)−100\text{Vig Percentage} = \left( \frac{\text{Negative Odds}}{\text{Negative Odds} + 100} \times 100 \right) + \left( \frac{100}{\text{Positive Odds} + 100} \times 100 \right) – 100$

For instance, with the following odds:

Phoenix Suns +350
Los Angeles Lakers -460

Calculate the vig as follows:

Lakers’ implied probability: $460460+100×100=82.14%\frac{460}{460 + 100} \times 100 = 82.14\%$
Suns’ implied probability: $100350+100×100=22.22%\frac{100}{350 + 100} \times 100 = 22.22\%$
Total probability: $82.14%+22.22%=104.36%82.14\% + 22.22\% = 104.36\%$
Vig percentage: $104.36%−100%=4.36%104.36\% – 100\% = 4.36\%$

So, moneyline bets on the Suns against the Lakers incur a 4.36% vig. Online calculators can simplify this calculation.

Additional Sportsbook Strategies

Beyond the vig, sportsbooks employ other tactics:

Adjusting Odds and Lines: Sportsbooks frequently modify odds to balance action and mitigate risk.
Balancing Books: They aim to even out bets on both sides to ensure profitability regardless of the outcome.
Exploiting Misinformed Bettors: They capitalize on bettors who lack knowledge or make poor decisions.

Why Do Sportsbooks Adjust Lines?

Sportsbooks adjust lines based on betting patterns to ensure balanced action. If a significant amount of money is wagered on one side, they shift the odds to attract more bets on the opposite side. This helps them maintain balanced books and guarantee a profit through the vig.

For example, if the Suns-Lakers game opens with:

Suns +4.5 (-110)
Lakers -4.5 (-110)

And most bets are on the Lakers, the sportsbook might adjust the odds to:

Suns +4.5 (-107)
Lakers -4.5 (-114)

This adjustment aims to attract more bets on the Suns and achieve a balanced book, ensuring a profit regardless of the outcome.

How Big is the US Sports Betting Industry?

Since PASPA was overturned in May 2018, sports betting in the US has expanded significantly. From a single state monopoly in Nevada, sports betting is now legal in nearly two dozen states. Revenue figures illustrate this growth:

Year	Combined Handle	Total Revenue	Combined State Revenue	No. of States with Legal Sports Betting
2018	$4.62 billion	$328.88 million	$39.13 million	8
2019	$13.07 billion	$915.17 million	$127.36 million	14
2020	$21.53 billion	$1.55 billion	$244.62 million	20

The industry is expected to continue growing, with annual revenue projected to reach $7 billion to $8 billion by 2025.

What is the Difference Between a Sportsbook and a Betting Exchange?

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Sportsbooks and betting exchanges operate differently. A sportsbook is a seller where you place bets, while a betting exchange allows you to be both a buyer and seller. At a betting exchange, you can set your own odds and match bets with other users, acting as both bettor and bookmaker.

Betting exchanges offer opportunities for trading and arbitrage, which can be more challenging to find in traditional sportsbooks. They also provide a broader range of betting options, though they may be more complex to understand.

Overall, while sportsbooks offer a straightforward betting experience, betting exchanges provide flexibility and potential value for savvy bettors.

When Did Sportsbooks Become Legal in the US?

Sports betting has a long history, closely tied to major sporting events. However, its legality in the US has evolved significantly over time.

Sports betting began gaining popularity in the 19th century, initially through horse racing and later baseball. The 1919 World Series game-fixing scandal involving the Chicago Black Sox tarnished its reputation. This scandal contributed to the negative image of sports betting.

In 1931, Nevada became the first state to legalize gambling. Before this, sports betting was widespread but largely unregulated. Following Nevada’s move, criminal organizations dominated the betting scene outside the state. This prompted the creation of the Interstate Wire Act of 1961, which aimed to curb illegal betting activities.

Despite Nevada’s legal status, underground bookies thrived, and offshore sportsbooks emerged with the advent of the internet. In 1992, Congress enacted PASPA (the Professional and Amateur Sports Protection Act), restricting legal sports betting to Nevada and a few other states with exemptions. This left most of the US with illegal or offshore options for sports betting.

The landscape changed dramatically in 2018 when the US Supreme Court overturned PASPA. This landmark decision lifted the federal ban on sports betting, allowing individual states to legalize and regulate the industry. Since then, many states have embraced legal sports betting, leading to the expansion of sportsbooks beyond Las Vegas and the rise of new, major legal betting operations.

Final Words on Sportsbook Profit

Sportsbooks are designed to generate profit through various mechanisms. The key to their profitability is the vig, or vigorish, which is the commission they charge on bets. This ensures that sportsbooks make money regardless of the outcome of individual games. While a favorite’s loss might increase their profit, the vig acts as a built-in safeguard, guaranteeing that sportsbooks remain profitable over the long term.