By Ivo Dimitrov – Sports Betting Product Expert
In the dynamic world of online sports betting, how odds are set impacts profitability and risk management. While traditional probability-based pricing has been the norm, liability-driven pricing (LDP) is increasingly important. This article explains LDP, its advantages, and how it interacts with the market’s perception of true probabilities.
What is Liability-Driven Pricing?
At its core, LDP adjusts odds based not only on the likelihood of an event but also on the financial exposure a bookmaker faces from existing and anticipated bets. This differs from probability-driven models that set odds based on estimated likelihoods and include a profit margin. While probability-driven models may not quickly react to betting pattern changes, LDP adjusts odds dynamically using real-time data.
Key Differences:
- Probability-Driven Models: These models calculate the likelihood of each outcome using various factors, such as the relative strength of teams or players, and convert these into odds, adding a profit margin. However, these models may not respond rapidly to changes in betting patterns. The true probability of a sporting event is difficult to predict due to many intrinsic factors, but it’s the closest estimation based on team or player data.
- Liability-Driven Pricing: This method adjusts odds in real-time according to betting data, making the opposite outcome more appealing if many bets are placed on one side, which helps balance the bookmaker’s liability and manage risk.
Currently, some operators manage LDP manually, engaging traders due to implementation complexities and costs associated with commercial models. However, with AI-driven automations and predictive, rapid adjustments, there’s a trend towards more advanced automation and adoption of hybrid models where traders oversee AI algorithms.
Impact on the traditional sports betting scene
The sports betting market aims to be an efficient marketplace where millions of punters worldwide try to predict outcomes based on knowledge and gut feeling. This influx of real money influences perceived probability, driving price adjustments. Bookmakers often combine both strategies, adjusting for perceived probability and liability management. Changes by big players rapidly propagate across the market, benefiting even smaller bookmakers through adjustments based on liabilities and updates driven by feed providers or manual price adjustments by trading teams, that closely monitor and adapt to the general market conditions.
The Benefits: Statistics Speak Volumes
LDP and especially commercial models that employ large data sets of liabilities and engage the power of AI, can offer significant advantages over traditional probability-driven pricing, which is supported by compelling statistics:
- Profit Margin: LDP can significantly boost profit margins. For example, Sportradar’s Alpha Odds, an AI-driven pricing model that also incorporates liability managed by the company, has shown a 10% higher profit margin compared to traditional models and an average of 15% during major events such as the UEFA European Championship Qualifying Matches.
- Trading Efficiency: Kambi’s Odds Feed+ has demonstrated an improvement in trading efficiency by up to 11%. Moreover, users of Alpha Odds have experienced a 22.7% boost in trading efficiency compared to a control group.
- Risk Management: By dynamically adjusting odds, operators can reduce variances in profit and loss, leading to greater financial stability.
- User Engagement: Dynamic pricing keeps odds competitive, attracting more bettors with valuable bets and increased betting volume.
Margin Application and Profitability
Traditional probability-driven models apply a fixed margin (overround, vig or vigorish in casino terms) to ensure profitability. However, LDP allows for dynamic adjustments of this margin. If the book is heavily tilted towards one outcome, the margin on that outcome may increase to offset potential losses. This flexibility helps bookmakers maintain profitability even when faced with significant financial exposure.
Conclusion: The Future of Odds Management
Liability-driven pricing is a sophisticated approach to odds management, blending probability with risk management. For iGaming professionals, this means potentially higher profits, improved risk control, and a more engaging betting experience. By adopting LDP models, operators can enhance their market position through superior pricing performance and implement strategic initiatives to drive growth and improve customer engagement. LDP is proving essential to meet players’ expectations and current standards in sports betting. By integrating LDP into their operations, iGaming professionals can take a significant step toward enhanced profitability and market responsiveness.
