If you're in the market for a new car, you’ve probably run across the term MSRP. What does this term mean, and how can you use it to negotiate a better price on your new vehicle?
What Is MSRP?
The MSRP is the Manufacturer's Suggested Retail Price. It's the price the automaker recommends that the dealer uses when selling a car. The MSRP is the price often seen in vehicle reviews and advertisements.
Car dealers are not bound to sell at the MSRP but are free to negotiate a price with their customers. Even though the car manufacturer issues its MSRP, dealers have the right to charge either more or less than the MSRP. In reality, the MSRP is simply the starting point for negotiating a price. Although most cars are sold at a price below the MSRP, a dealer can also charge more than the MSRP if the model is in particularly high demand.
The MSRP includes the vehicle's price from the manufacturer plus any delivery and destination charges. The MSRP will not represent the full “out the door" price you can expect to pay for your car since dealers usually add options that you may or may not want on your car. MSRPs also don't include local sales taxes.
The MSRP is also known as the “Monroney label” or the “sticker price” and must appear on the side windows of all new cars. This regulation was created by the Automobile Information Disclosure Act of 1958 and named after the bill's sponsor, Oklahoma Senator Almer "Mike" Stillwell Monroney.
Read More: The Best Ways to Buy a Car
What Is a Base Price?
The base price of a vehicle is the price of the car without any options or upgrades and is the starting point for the total price of the car. The sticker price of the car in the showroom includes a destination charge, title and registration fees plus such dealer add-on options as deluxe floor mats, wheel locks, undercoating alarm systems, window tinting, pinstriping accents and nitrogen-filled tires.
Dealer add-ons are listed separately on a supplemental sticker.
What Is the Dealer’s Invoice?
The invoice price is the price a dealer pays the auto maker for a car. It's usually several thousand dollars below the MSRP. The difference between the retail selling price to the customer and the dealer’s invoice would be the profit margin for the dealership.
Since the invoice is the price the dealer pays the manufacturer for the car, it's highly unlikely that you'll find a dealer willing to sell for less than invoice price. Nevertheless, this is possible because there are other ways for a dealer to make money from the sale of a car. Manufacturers occasionally offer dealers incentives, such as cash rebates, if they sell more of a particular model of car.
Manufacturers also offer a type of rebate known as a holdback. This is an amount of money, typically two to three percent of the MSRP, that the manufacturer pays to the dealer after closing the sale of a car. The amount of the holdback is at its highest when the car is first delivered to the dealer. It reduces to zero after a certain period, usually 90 days. This method creates an incentive for the dealer to sell cars quickly to increase inventory turnover to get the maximum holdback.
Unfortunately for you as a buyer, you'll never be really sure how long the dealer has had a vehicle on their lot, so you won't know how much holdback the dealer is receiving for the car you want to buy. You won’t see this figure because it's not included on the dealer's invoice. Nevertheless, holdbacks and other manufacturer-to-dealer rebates are a source of profit for the dealer. So if a dealer tells you that you're getting a great price and really buying the car at their invoice price, this may not be true.
Dealers also make money from financing the sale of a car. This profit doesn't show up on an invoice. So, even though it may appear that the dealer does not make a profit from a sale over invoice price, dealers also make profit with bonuses from the manufacturer and other optional add-ons.
How Is Actual Selling Price Determined?
Several factors affect the pricing of a new car. If the demand for a particular model is high, the selling price will likely be close to its MSRP. Dealers don't have to discount their prices because buyers are willing to pay higher prices.
Remember the 2000 Chrysler PT Cruiser? Buyers were lining up to pay $5,000 over its MSRP.
Cars with low demand sell at prices further discounted from the MSRP. This is especially true at the end of a car year when dealers need to clear their inventory to make room for new models.
Read More: How to Bring Down a Dealer's Price
How Much Is the Retail Selling Price Over Invoice?
The total price of the car affects the dealer's profit margin over invoice. Lower-priced cars, like the Toyota Corolla, will have a profit margin in the range of five percent. More expensive luxury cars, such as BMWs and Mercedes, will have higher profit margins, often exceeding 10 percent.
Cars in high demand, like special models of the Chevrolet Corvette or Ford Mustang, can sell at prices close to full MSRP or even higher. Prices over MSRP are known as “over sticker.” Manufacturers discourage pricing above MSRP, but they can't prevent a dealer from charging more. After the dealer has purchased the vehicle from the manufacturer, they're free to sell the car at whatever price the market will pay.
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How to Use MSRP and Dealer’s Invoice to Negotiate the Best Price
By understanding the meaning of MSRP, dealer’s invoice, base price and manufacturer incentives, you can develop a car-buying strategy for getting the best price on your new car.
Generally, it's best to negotiate a price from the dealer’s invoice up rather than trying to negotiate from the MSRP down. When it comes to buying a car, knowledge is power. Knowing the amount of the dealer’s invoice gives you a good starting point. A car dealer has the right to make a profit, but you also have the right to pay a fair price.
Before starting your journey toward buying a new car, you should do some online research with websites such as Kelley Blue Book and Edmunds to get the average prices paid in your geographical area for the make and model you want to buy.
- Edmunds.com: What Is MSRP? Manufacturer's Suggested Retail Price for New-Car Buying
- Cars.com: What Does MSRP Mean?
- Car and Driver: Car MSRP vs. Invoice: Everything You Need to Know
- Autotrader: Buying a Car: How Much Do Dealers Mark Up a Car Over the Invoice Price?
- Autotrader: Buying a Car: Why Isn’t the MSRP Also the Final Price?
- Edmunds.com: Negotiating a Dealer's New Car Add-Ons
- Bankrate: Dealer Holdback
- U.S. News: What Is Dealer Invoice Price?
- Car and Driver: Do Not Pay Over Sticker Price
- The United States Department of Justice Consumer Protection Branch: Automobile Information Disclosure Act
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.