Margin control: avoiding ‘overround erosion’ in the betting industry

Margin control: avoiding ‘overround erosion’ in the betting industry

Thursday, July 13, 2017 Posted by James Walker

At this week’s iGaming Super Show, Guy Harding, head of commercial at Oddschecker, spoke extensively on the issue of price and margin control, and how so-called ‘overround erosion’ can have severe consequences for operators.

Speaking to delegates, Harding discussed the potential damage bookmakers are doing to themselves through overround erosion, which refers to the imbalance between offers or bonuses used to entice customers and the impact they have on operators’ final margin.

According to Harding, an ‘overround’ is effectively the margin a bookmaker takes from the price. Citing the classic coin-flip example, if a bookmaker were to price heads or tails, the price would not be evens. Instead, it would likely be priced at 4/5, thus showing the overround achieved by the bookmaker.

Thus, overround erosion is exactly what it says it is: the erosion of margin taken on price by bookmakers.

“Overround erosion can have severe consequences,” explained Harding, who went on to note that “1% erosion is an effective 80 basis point drop on the bottom line.”

Harding used enhanced place terms in horse racing as a prime example of overround erosion in action. Most firms now have ‘enhanced odds’ or ‘extended place terms’. which simply leaks value to customers, thus detracting from the overall price achieved by bookmakers.

According to Harding, the tussle between trading and marketing teams is clear to see across the industry. And as operators continue to throw enhanced specials and better odds at customers for retention or new traffic purposes, overround erosion continues to happen.

In a graph shown to conference delegates, Harding demonstrated the reduction in overround. Previously, the percentage sat at a peak of around 106.25%, whereas it has since dipped below 104% -- a clear sign of erosion.

Although it has recently spiked upwards again, Harding pointed out that it tends to move up every now and then in an almost cyclical fashion, before declining again.

Again evoking the coin-flip analogy, the Oddschecker executive suggested that some of the world’s largest operators are losing market share to the ‘tail’. There are far more enhanced offerings across the world to attract customers now hence the tail has the ability to grab a degree of market share, he said.

Overall, when asked if customers are truly price sensitive and thus erosion is necessary, Harding stated: “I think they are to a degree, but not as sensitive as they should be.”

When pressed for why he believes that to be the case, Harding explained: “The hassle factor of having multiple online wallets means people tend not to move between the Big Seven.”

Totally Gaming says: Guy Harding offered delegates at the iGaming Super Show a unique glimpse into price and margin control. It will be interesting to see if this overround erosion continues to occur, as theoretically, it won’t be long before there will be nothing left to erode.

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