How Do Sportsbooks Make Money?

Sportsbooks generate big bucks, which is great news for Arizona after the state’s legalization of sports betting. Essentially, the more money that sportsbooks within Arizona generate, the more revenue that the state collects. This might leave you wondering, how do sportsbooks actually make money?

There are many misconceptions around this very topic. Some believe that sportsbooks make money only when favorites fail to win, while others know that sportsbooks aim to set themselves up to always guarantee a return, though they may not know the ins and outs of how books do this. This guide will give you a better understanding of how sportsbooks operate and make money.

How do sportsbooks actually make money?

Sportsbooks are businesses, so it makes sense that profit is one of their main goals. To ensure that their accounts remain in the black, they need to be as savvy as possible in an industry where risk is the name of the game.

Instead of relying on freak results to make money, sportsbooks primarily control how much money they can make when they are setting their odds. Basically, they include their commission in odds when calculating them. The easiest way to understand this is through the example of a coin toss. If you were to flip any coin, the only options are heads or tails, with a 50/50 chance of either one of them happening.

In an ideal world, a 50/50 chance translates to odds of +100 because the probability of either happening is equally 50%. However, since a sportsbook aims to profit from this transaction, it would include its cut and instead offer you odds of around -110 on either side.  So a bettor who wants to win $100 has to stake $110 at odds of -110 instead of $100 at odds of +100.

Let’s say that two people accept this wager; one places a bet on heads and the other on tails. Both wager the same $110. The book accepts $220, but since only one bettor will win, the book will pay out $210 to the winner at odds of -110. Regardless of the outcome, the book will receive a guaranteed $10. This commission is the vig.

What is the vig?

The vig is short for vigorish, which is the popular name for the sportsbook’s cut. As explained above, vigorish is a commission or fee that the sportsbook charges on any wager it takes. Vigorish is always part of the betting odds, so you don’t need to worry about paying the vig as an additional or separate fee.

In your betting circles, others may refer to the vig with names such as commission, juice, cut or house edge. So if you hear any of those terms, just know that they are talking about vigorish.

Vigorish is most evident on odds of -110, like point spreads and game totals. Here is one such example you could see on the DraftKings Arizona app:

In such an example, it’s really easy to see the vig. For either side to win $100, you need to bet $110, so the sportsbook reserves $10. If you’re betting on point spreads and totals, spotting the vig shouldn’t be too much of a hassle since both sides usually have odds right around -110.

That doesn’t mean that the vig doesn’t come into play for other odds. For example, in moneyline bets the two sides rarely ever have balanced odds. In such a scenario, you just need to calculate the vig for yourself. Here is the formula to get the juice on any game:

  • (Negative odds/(negative odds + 100) x 100) + (100/(positive odds + 100) x 100) – 100 = percentage of vigorish

For example, let’s calculate the vig on a basketball game with the following odds at BetMGM Arizona:

To get the vig, you need to calculate the implied probability of each team using the formula above. The Lakers are the favorites, so their implied probability will be calculated through the following formula:

  • (Negative odds/(Negative odds + 100) x 100) = implied probability of the favored team.
  • Hence, the Lakers’ implied probability is 460/(460 + 100) x 100 = 82.14%

The Suns are the underdogs, so use the following formula if you wish to get their implied probability:

  • (100/(positive odds + 100) x 100) = underdog’s implied probability.
  • Therefore, the Suns implied probability is 100/(350 + 100) x 100 = 22.22%
  • Once you have both probabilities, just add them up.
  • 82.14% + 22.22% = 104.36%
  • Finally, subtract 100% from the sum of the probabilities to get the percentage of juice that the sportsbook is charging. In this case it’s 4.36%.

So moneyline bets placed on the Suns at the Lakers will cost a 4.36% commission.

If the formula is too complex, remember that many free online calculators will calculate the vig for you after you input the odds.

Additional sportsbook tactics

The vig is the primary way that sportsbooks make money. Aside from that, they will employ the following moves:

  • Continuously tinkering with their odds and lines.
  • Balancing their books to minimize risk.
  • Relying on misinformed gamblers.

Why do sportsbooks move lines?

Keen bettors know that odds and lines are always subject to change. One reason why odds change is because sportsbooks try to react to the market.

If sportsbooks release their lines and then see that the public is strongly backing one side of the bet, they’ll shift the odds to make the other side more attractive to try to even out the wagers. Sportsbooks do this in an effort to attract equal action on both sides, in which case the vig guarantees a profit.

For example, let’s say that the Suns-Lakers game opens with the following point spread and odds on Caesars sportsbook app:

  • Phoenix Suns +4.5 (-110)
  • Los Angeles Lakers -4.5 (-110)

Suppose, at those numbers, that the majority of bets are coming in on the Lakers’ side. The sportsbook notices this and takes steps to minimize its risk. It alters the odds to try to encourage more action on the Suns. So the odds may shift to the following:

  • Phoenix Suns +4.5 (-107)
  • Los Angeles Lakers -4.5 (-114)

Now, some bettors who wanted to wager on the Lakers may shy away because of the decreased value. And bettors who were hesitant to bet on the Suns may be bolder with slightly better value. This can help the book achieve its desired balance. This way, whichever team covers the spread, the sportsbook is still guaranteed money.

That’s why you’ll also notice the lines themselves shifting for spreads and totals. For instance, if the above change doesn’t have the desired effect, you may see the spread shift to +5/-5, as well.

How big is the US sports betting industry?

Sports betting in the US has experienced exponential growth since the overturning of PASPA in May 2018. One state, Nevada, used to have a monopoly on sports betting, but now the activity is legal in close to two dozen states.

Sports betting revenue in 2020 was roughly 1.5 times the revenue of 2019 and nearly five times 2018’s revenue. The table below better illustrates how big the US sports betting industry is:

YearCombined HandleTotal RevenueCombined State RevenueNo. of States with Legal Sports Betting
2018$4.62 billion$328,876,857$39,128,2638
2019$13.07 billion$915,172,754$127,364,11414
2020$21.53 billion$1,545,524,400$244,621,47420
  • Handle is the total amount that bettors wagered.
  • Revenue is what sportsbooks earned after taking out winning wagers.
  • State revenue is the amount in taxes that sportsbooks paid to their respective states.

The industry is set to continue growing as Arizona online sports betting contributes to the above numbers. Experts predict that annual sports betting revenue could reach $7 billion to $8 billion by 2025.

What is the difference between a sportsbook and a betting exchange?

Sportsbooks and betting exchanges are two completely different things. When you hear of betting exchanges, think of exchange-traded markets like the stock market.

Sportsbooks have a rigid operation. In essence, they are the seller, and you are the buyer. At betting exchanges, you have the freedom of being both the buyer and the seller. This means that you can set odds for an event, and if a willing customer likes those odds, that customer can place a wager. If the customer wins, you pay out, but if you win, you gain the reward just like a sportsbook would. The betting exchange, meanwhile, acts as the middleman in such a scenario by providing a platform for such an exchange to take place.

So betting exchanges allow you to be both the sportsbook and the bettor. Such exchanges are good for bettors who are interested in trading and arbitrage (backing both sides of a bet in a way that you’re guaranteed money regardless of the result). Such opportunities may be hard to come by on traditional sportsbooks, which can make betting exchanges even more appealing.

Another great advantage of a betting exchange is that there are numerous betting possibilities. Since many of the people offering these bets aren’t industry experts, there’s a huge potential of finding value on such exchanges. You can find an event that isn’t available at a traditional sportsbook, or if you find a game that is on your regular betting site, there’s a chance that you can get it at better odds.

One disadvantage of betting exchanges is that there’s no guarantee that others will match your bets. Additionally, sportsbooks are more straightforward to understand while many users may struggle to grasp the concept of betting exchanges.

When did sportsbooks become legal in the US?

Sports betting has existed throughout history. Sports and sports betting have often gone hand in hand. Whenever there was a major sporting event, you’d likely find a group of people aiming to profit from such events.

Sports betting in the US started gaining traction in the 19th century, first through horse racing, then through baseball. Betting-related scandals would dampen this, however, and none more than the 1919 World Series game-fixing scandal involving the Chicago Black Sox.

This scandal helped contribute to sports betting’s unsavory reputation. In the years after, Nevada was the first state to legalize gambling. This was in 1931. Though the activity was illegal in the US before then, it was one of those things that the authorities never pursued despite its prevalence.

After Nevada made gambling legal, criminal organizations began playing the role of the bookie in places outside of Nevada. This made the government react, which led to the Interstate Wire Act of 1961. Bookies, then, became a local, underground activity, with Nevada the only place where sportsbooks could operate legally.

Favorable laws in the 1970s, such as the lowering of taxes on sportsbooks, made more states move toward legalizing sports betting. However, in 1992, Congress enacted PASPA (the Professional and Amateur Sports Protection Act), restricting sportsbooks to Nevada. Three other states were part of that exemption, but Vegas was the only place where you could get a real wager.

So underground and local bookies continued to thrive. Additionally, the internet age meant that bettors could place wagers on offshore sportsbooks. However, in 2018, the US Supreme Court overturned PASPA, and the ban on sports betting finally lifted after 25 years. This allowed each state to legalize and regulate sports betting if it wished to do so.

Since then, many states have legalized sports betting, meaning that sportsbooks are no longer underground operations. Sportsbooks from Las Vegas expanded their operations and ventured into other states, while other major sportsbooks started from the ground up and are now the legal, multimillion-dollar operations that we use to place bets.

Final words on sportsbook profit

Sportsbooks may sell risk to you, but they have many measures in place that guarantee profit. Sportsbooks make money by charging a commission, aka the vig, so they do not need to rely on unexpected results to make money. Sure, when a favorite loses, they may end up cashing in more, but think of vigorish as the safeguard that assures them profit regardless of a game’s outcome.