The trader's dilemma: True price versus optimal price

At first glance, this might seem like a false opposition. Historically, traders have based their livelihoods on being able to accurately calculate the true probability of an outcome through a combination of mathematics, instinct and experience. This probability should, therefore, be the optimal price – except it’s not. As markets become increasingly competitive and an increasing number of operators chase revenues from a finite player base, pricing is rightfully being redefined as a means to an end, rather than the end itself.

The goal is to maximise GGR, and there are a multitude of factors at play. First and foremost is a robust understanding of true probabilities. In addition, we need to understand the price sensitivity of the player base. Reducing the house margin from 4% to 3%, for example, is worthwhile only if compensated by an increase in turnover of more than 33%. Comparing pricing in the UK versus Sweden gives a clear indication of the relative price elasticity of demand – markets are priced in the knowledge that the typical UK punter is more driven by price than his Swedish counterpart.

A sensitive subject

Price sensitivity, however, is not a constant. During the Ryder Cup, for example, US punters will be disproportionately price sensitive on Europe, while exposure on the US will be accumulated through non-sensitive recreational players. In Europe, we’ll see the opposite phenomenon, so data from multiple jurisdictions can help to precisely articulate price sensitivity by region.

But margin isn’t the only answer. During the FIFA World Cup, almost 50% of revenues came from players who registered during the tournament. Acquisition is, therefore, key and a key part of acquisition is pricing. Again, true pricing isn’t necessarily optimal. Bookmakers regularly offer price boosts and other standout offers in order to acquire players. While the first bet carries a negative expected margin, the likelihood of converting even a small number of those players into second depositors justifies the use of price boosts as loss-leaders. The ability to ‘freeze’ prices also empowers an operator to use pricing as a marketing aid. Although these prices might not be entirely aligned with ‘true probability’, taking a ‘non-true’ margin on new acquisition is better than ‘true’ margin on zero. Almost all active VIPs will have taken advantage of a bonus or price boost at some point in their lifecycles.

We understand the significance of pricing as a marketing mechanism. It’s for this reason that we strive to arm our operators with enough ammunition to control pricing with a view to driving acquisition, while always maintaining a long-term perspective.

Pricing does, of course, go beyond acquisition, boosting turnover and maximising GGR. It is an important tool for aligning trading strategy with an overall operator strategy. To always hold true pricing, regardless of exposure, will inevitably lead to a high degree of revenue volatility. While this might be welcomed by some operators, others might want to take a more balanced approach.

Flexibility and flow

A pricing strategy, and a sportsbook, should be sufficiently flexible to align itself with whatever strategy an operator decides. Simply adjusting the house margin will impact turnover, but won’t make any material difference to its flow, as underlying probabilities remain fixed, meaning players will choose either to accept unattractive prices or to go elsewhere. With true price differentiation, an operator can adjust the underlying probabilities themselves, thus actively affecting the flow of turnover without being forced to offer an unattractive book.

As a real-world example, let’s go back to the Mayweather vs. McGregor fight. A bookmaker has three potential trading strategies here – follow the market, follow the book, or follow true price. On top of this, we must consider the fact that Mayweather backers will typically be price sensitive, whereas McGregor backers will be recreational. Each strategy has its own merits, and each operator will determine theirs based on their specific circumstances.

Operators often sponsor teams, have brand ambassadors or focus their marketing efforts on specific niches. This requires a sportsbook to be flexible so that the prices shown to players will tell the same story as the one pushed by an operator’s brand. And while some of our operators’ stories may be summed up as “we show you the true price at a competitive margin,” it is certainly not the brand message every operator wants to push all the time across their entire offering. As a supplier we recognise that the value of true pricing is an academic exercise confined to a theoretical environment. Optimal pricing, however, takes true pricing and adapts it to real world situations, never losing sight of the fact that pricing is merely one means of achieving the overarching goal of maximising GGR.

Ifran Parvez has over a decade’s experience in the sports betting industry, with a focus on trading and business intelligence. He currently leads SBTech’s risk management, analytics and business intelligence function, with a view to optimising all aspects of trading, and well as helping operators make data-driven decisions.