Staking Basics: Mark-Up and Profit Sharing

This article is published by courtesy of 2CardsCollege Pro Training Program. Today,
we are going to talk about two models of staking: mark-up and player-backer profit
sharing. What does 1.17 mark-up presume, what does 20% player profit share
mean, and how do they compare?

Selling stakes with a mark-up

Currently, the basic and most widespread method of selling stakes is selling with a
mark-up. The idea of а mark-up is that a backer is placing a bet by purchasing a
share. Let’s consider an example.

When the backer buys a 10% share with a 1.17 mark-up in a $1,000 offer, he pays
$117 instead of $100, securing 11.7% of the buy-in and getting 10% of the prize. In
fact, the backer pays another $17 for the right to buy the share and that money goes
straight into the player’s pocket.

Thus, by paying $117, the backer bets that the player is going to produce more than
17% ROI in the long-run. Then, he will receive no less than $117 for his share. In this
case, 17% ROI is the breakeven point for the backer.

From the player’s perspective, the idea of mark-up is that he waives his claim to a
share of the prize for receiving a specific fixed amount, determined by mark-up and
total sum of the buy-ins.

The table shows that the player is granted a $17 profit regardless of his winning or
losing.

This method is suitable for a player seeking to exclude all of the risks and get a
steady income. At the same time, he should be ready to limit his prospects of
winning by a lot. For this player, his future profit “freezing” occurs precisely when he
sells the stake.
In fact, the player insures a part of his investment in the buy-ins and gets a steady
17% ROI that no one can take away from him.

When choosing this method, the backer takes all the risks. If the player wins less,
only the backer incurs losses. If the player wins more, the backer gets the deserved
reward for the risk.

Selling stakes with profit sharing

When selling stakes with profit-sharing, the player does not get any extra margin in
advance. If the backer provides 10% of the buy-in, he pays exactly $100. However,
in this case, the backer gives the player a part of the profit from the purchased stake
in the given offer or a group of offers. This share of profit can range from 10% for the
complicated, high-variance tournaments to 50% for longer term backing.

In the case of а mark-up, the player’s income only depends on his total amount of
buy-ins instead of his profit. The key factor is how many buy-ins a player sells and
how much they are worth. His yield from selling the stake will grow proportionally. On
the contrary, a player’s share of profit depends on his winnings. Therefore, it is only
possible to establish a correlation between the mark-up and profit sharing for a
specific ROI since the ROI displays the buy-in to pot ratio.

The table below shows an example of a 20% ROI for a 1.17 mark-up in the first case
and 20% profit share for the second case. You can see that the ratio of profit is
significantly different for the player and backer when using mark-up or profit sharing.

It may seem that profit sharing is very unfair to the player, but it is not. If the player
achieves the expected ROI of 20%, not all of the offers will have been played out, as
shown in the table. The player will not always get $4 instead of $17 from each offer.
In most cases, when the player loses, his backer takes all the losses. On rare
occasions, the backer pays the player’s share from the profitable offers. On average,
a player makes more from an offer than his backer does.

To make these points clear, let us consider the long-run, assuming that the
probabilities of winning and losing are 25% and 75%, respectively.

Let’s set the values of profit by purposeful selection: (value of profit from the positive
offers)*(probability of 0.25) added to (value of profit from the negative
offers)*(probability of 0.75) should yield a weighted profit of $20.

Then, just like in the first case, the ROI will be 20%, but the player only gets a profit
share from his profitable offers. Consequently, the player’s total profit is going to be
higher than it was in the previous example.

Even in this situation, a player with a 20% ROI would make more by using a mark-up
instead of profit sharing. Now, let us consider the situations with the calculated
distribution of probabilities of winning and losing and a higher ROI in addition to that.

With the help of a variance calculator, we can evaluate the chances of winning or
losing for the specific data provided. For example, let’s review a 500-entry
tournament with 63 places in the money, $1 buy-in, and 20% expected ROI over a
20-tournament sample.

Thus, if the expected ROI is 20%, the breakeven point is 67%. In 67% of the cases,
there will be an average loss of-$13 and in 33% of the cases, there will be an
average profit of $87. This matches the weighted profit of $20 or 20% ROI in the
long-run. The player will receive 29% (5.74/20) of the profit.

If we input ROI=40% into the variance calculator, the percentage ratio of profit shifts
towards equilibrium between the backer and the player. Almost half of the profit,
47%, goes to the player.

It is obvious that the higher the player’s ROI is, the more beneficial it is for him to
choose profit sharing over mark-up.

Conclusions

When a player chooses between selling stakes with a mark-up or profit sharing, he
should primarily assess his present stamina, skills, and talents.
If the player is not confident in his abilities or gets on a downswing, playing with a
mark-up is a more risk-free option for him. Regardless of the result, he will get a
margin. Playing under a profit sharing model, a losing player will get nothing.
Simply put, for a player, a mark-up is stability and profit sharing is maximizing the
profit.

On the contrary, buying with a mark-up is riskier for a backer. In case of a losing
player, a backer loses not only the amount of invested in buy-ins, but that amount
multiplied by the mark-up, which increases his losses significantly.

In case of a losing player with profit sharing in the long-run, a backer only loses the
amount invested in buy-ins.