What is MSRP and How Does it Affect Car Purchase?

What is MSRP?

MSRP, short for Manufacturer's Suggested Retail Price, represents the price recommended by the automaker for their dealerships to sell a particular vehicle. It is essentially the price the manufacturer suggests consumers should pay when purchasing the car.

Since most car manufacturers operate through dealerships, these dealers act as intermediaries. They purchase vehicles from the manufacturer at a set price and then sell them to consumers at the MSRP, which is higher. This allows the dealership to make a profit on each vehicle sold.

This pricing model helps manufacturers to maintain consistent pricing across different markets, protecting both consumers and the manufacturer from potential price manipulation by unscrupulous dealers. 

The MSRP is also known as the list price or sticker price and is typically displayed on the window sticker of a new car at the dealership. 

 

What does MSRP include?

The MSRP of a vehicle includes the following components:

• The base price of the vehicle's specific trim level.

• The cost of optional features and upgrades, such as advanced safety technology, all-wheel drive systems, leather seats, engine enhancements, and more. These additional features are typically listed separately along with the MSRP.

• The inclusion of the standard manufacturer's warranty and any associated service coverage.

 

How does MSRP differ from the invoice price?

MSRP is the price suggested by the manufacturer for customers, while the invoice price is what the dealer pays to the manufacturer. 

Dealerships act as middlemen between the manufacturer and the customer. They buy cars from the manufacturer at one price and then sell them to customers at a higher MSRP, making a profit on each sale. Dealerships can also make money by offering financing options and selling extra products and services.

Car dealerships can also earn money through a holdback fee given by the automaker and by selling additional things like warranties, insurance, and other add-ons.

 

Read: A Guide to Car Financing Lingo

 

Difference between MSRP, base price, and final price

• Base price: The base price is the cost of the vehicle itself, without any extra options or add-ons. It's the starting price before the dealership adds any additional fees or taxes.

 

• Invoice price: The invoice price, also known as the "dealer cost," is what the dealer pays to the manufacturer for the car. It's the price the dealership paid to get the car in their inventory.

 

• Final selling price: The final selling price is the total amount you pay to purchase the car. It includes the negotiated price, sales tax, dealership fees, additional accessories, extended warranties, and other costs. This is also known as the "out-the-door price."

 

Factors that affect MSRP

 

1. Trim Levels:

• The choice between a base model and a fully loaded version can impact the MSRP.

• Fully loaded trim levels often come with more advanced features and higher price tags.

 

2. Additional Features or Packages:

• The inclusion of extra features like leather seats, surround sound systems, alloy wheels, etc., can increase the MSRP.

• Optional packages that bundle together multiple features may also affect the price.

 

3. Engine Upgrades:

• Opting for a more powerful engine, such as a turbocharged or V8 engine, can raise the MSRP compared to a standard V6 engine.

 

4. All-Wheel Drive or Four-Wheel Drive:

• The choice to have all-wheel drive or four-wheel drive capability in a vehicle can contribute to a higher MSRP.

 

Read: AWD vs. 4WD: Understanding the Difference

 

Can you negotiate the MSRP?

It is recommended that you negotiate a purchase price below a vehicle's MSRP. Car dealerships purchase vehicles from manufacturers at a cost lower than the MSRP, allowing room for negotiation at the retail level. 

In the past, dealerships kept invoice pricing secretive, but it has become relatively accessible online. 

By conducting thorough research and considering less popular models, you can often avoid paying the MSRP for a vehicle and negotiate an agreeable price.

 

How to get the best or lowest vehicle price?

 

1. Check for available incentives

You need to be aware of the incentives that are common in the automotive industry. These can include rebates for college graduates or government incentives for electric and plug-in hybrid vehicles. These incentives are not typically included in the MSRP. Instead, the dealership will apply these discounts during the financing process.

Pay close attention to the numbers to ensure that the dealer doesn't inflate the MSRP and then add the rebates. Also, be careful if they use the rebates to meet your desired selling price. The dealer receives the rebate from the manufacturer, so they should lower the selling price to the agreed amount and then apply any applicable rebates.

Picture this: You're eyeing a vehicle with a hefty $20,000 MSRP. You haggle and negotiate hard, finally settling on a selling price of $19,000. And there’s an additional $1,000 manufacturer's rebate on the selling price. Ideally, that rebate should bring your final price down to $18,000. But some dealers may try to use the rebate to meet your negotiated price, keeping the selling price at the MSRP. In other words, they'll be the ones pocketing the benefits of that rebate.

 

2. Research market value

Take the time to narrow down your choices to a few potential vehicles and then conduct thorough research on their market values online. Keep in mind that market values can fluctuate based on various factors, such as market conditions, incentives, and the availability of different options. Being well-prepared is crucial.

By arming yourself with this knowledge, you can avoid making overly low offers that may signal to the dealers that you lack the preparation or knowledge to strike a fair deal. Remember, it's all about finding the right balance and showing the dealer that you are informed and ready to negotiate a reasonable agreement. 

 

3. Negotiate up

Many people tend to haggle down from the MSRP. However, it is more advisable to begin by finding out the car's invoice price and negotiate upwards from there. This approach allows you to have better control over the negotiation process.

If you're considering purchasing a used vehicle, it's important to search for the car's book value. This value represents the original cost of the vehicle minus the depreciation it has undergone over time. This range allows you to have some flexibility in reaching a fair and reasonable price for the used vehicle you're interested in.

 

4. Focus on the out-the-door price

In order to get a good deal, focus on the "out-the-door" price of the vehicle rather than the monthly payments. Salespeople often emphasize fitting the monthly payment into your budget, potentially diverting your attention from the total cost. Be aware that extending the loan term to lower monthly payments can actually increase your overall expenses.

The out-the-door price includes not only the car's selling price but also any additional expenses like taxes and fees. By concentrating on the complete cost of ownership, you can make a more informed decision when buying a car. To ensure a good deal, prioritize negotiating the total price of the vehicle. 

In conclusion, understanding MSRP is crucial when buying a vehicle. Research market values, negotiate from the invoice price, and be aware of incentives. By being well-prepared, you can secure a fair deal.