Formula One (F1) teams generate revenue from many sources, such as sponsorship, prize money, merchandise sales, partnerships, licensing agreements, and other miscellaneous sources.
Sponsors
Sponsorship is one of the primary sources of revenue for F1 teams. In exchange for exposure and association with the team, companies pay for branding on the car, driver’s suit, crew attire and team merchandise. The value of sponsorship deals varies depending on the team’s performance, popularity, and the sponsor’s marketing goals. For example, Red Bull and Tag Heuer. Put it this way, the more popular a team, the more likely they are to attract high-value sponsorship deals, which can add to their revenue.
Prize Money
Prize money is another crucial source of revenue for F1 teams. The prize money is awarded based on the team’s performance in the championship. Expectedly, the higher the team finishes in the championship, the more prize money they receive.
The total prize money is split between the teams based on their position in the championship. Therefore, if a team performs well throughout the season, they can earn significant prize money, contributing to their revenue and motivating everyone in the team to ensure that they perform to the best of their abilities in every race. Keep in mind, the winner of the drivers’ championship is not awarded prize money because drivers are technically still employees that are part of the team, instead they get paid salary.
Although this type of awarding system sounds fair on the surface, it has received backlash from teams that have not been performing as well. They argued that, top teams are able to spend much more on R&D to improve their car’s performance and further extending the performance gap. Hence, F1 has reduced the disparity between the value awarded to the top and bottom teams for their performance. The 1st place is entitled to a 14% share of the overall prize pool, while the team in last place is awarded a 6% share. Previously, it was a 20% and 4% share.
Actual figures are not disclosed but it is estimated that F1 distributes a prize pot of $900 million, taking up around 20-25% of their yearly profits.
Push for efficiency and cost caps
Aside from reducing the pay disparity through allocating a bigger share for the bottom teams, F1 has also pushed teams to be more efficient in their operations and lower costs by implementing cost caps. This will ensure wealthy teams are unable to obtain an unfair advantage over other teams on the track by investing absurd amounts of money in their car.
The 2021 budget cap was to be set at $175m, but it was decided that it should be cut down to $145m. The cap was further reduced to $140m for 2022, with plans to further cut the limit down to $135m for the 2023 season until 2025. Although this doesn’t include other team expenses such as drivers’ salaries, legal costs, travel costs and others, the cost cap does cover car performance related expenses such as team personnel, car parts and equipment.
Merchandise and Licensing
F1 teams also generate revenue through merchandise sales. Fans can purchase team merchandise such as clothing, hats, and accessories on the team’s website, at the race track, or through licensed retailers. The merchandise sales are a significant source of revenue for the teams, and the popularity of the team and driver has a direct impact on the merchandise sales. Teams can also offer exclusive merchandise items and limited-edition products to attract more fans and increase their revenue.
Not only that, F1 teams can generate revenue through partnerships with race tracks, licensing agreements, and other miscellaneous sources. For instance, teams can form partnerships with other companies to promote their products and services, leading to additional revenue streams. Licensing agreements for F1 video games, toys, and other products can also contribute to a team’s revenue.
Fanatics, who became the official F1 merchandise retail partner at grand prix weekends and online five years ago, said they have experienced a rise of 1,085% since 2018 and 101% since 2022 alone, of people purchasing Formula 1-related merchandise.
Conclusion
In conclusion, F1 teams make money through a combination of sponsorship, prize money, and merchandise sales, along with partnerships, licensing agreements, and other miscellaneous sources. The revenue generated from these sources allows the teams to fund their operations, invest in research and development, and remain competitive in the championship. By diversifying their revenue streams, F1 teams can ensure their financial stability and long-term success in the sport.
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