You've seen it on too many car commercials to count. Directly after the military-grade SUV thunders across mountain streams, but right before the Italian sports car hits 150 in a school zone, a friendly voice announces an entirely reasonable sounding number as the "MSRP."
You may not be paying attention. In fact, if you're anything like me, the only thing you really want to know is how well the vehicle banks through a mall kiosk. They always leave that out.
For functioning adults, however, who can handle the promise of a new car without wanting to drive it through a Toys R' Us, there's the MSRP. What exactly does it mean?
What Does MSRP Mean?
"MSRP" means Manufacturer Suggested Retail Price. Your car dealer may also call it the "sticker price." Basically, this is the price on the tag.
What Is an MSRP?
The MSRP is the price that automakers suggest the car sell for. It's why you see it on all of the ads paid for by the car companies themselves.
To understand how this works, you have to know the difference between an auto manufacturer and a car dealership. Basically, manufacturers like Ford (F) - Get Report and General Motors (GM) - Get Report are the companies which actually make and ship the cars themselves. They do not run the dealerships.
An automaker will license dealerships to individuals, who own, operate and run the car lots themselves. The full nature of this relationship is complex and beyond the scope of this article, but the bottom line is that every dealership is an independent business separate from the car company. A Ford dealership, as part of its deal with the automaker, will get to use Ford's branding and logos to sell Ford's cars. It isn't a part of the Ford Motor Company though.
So car dealers can set their own prices on any car they want.
Dealership Pricing and MSRP
As noted above, MSRP is the price that automakers suggest the dealer sell the car for. Their leverage is a carpet-bombing campaign of advertisements. If General Motors announces a new Chevrolet for $20,000 and Eddie's Cars'n'Such sells it for $25,000, Eddie will have plenty of customers demanding lower prices.
Nevertheless, car dealers will often sell their cars for less or more than the MSRP depending on what the market will bear. In a tight market with a popular vehicle the dealer may mark prices up just because he can.
A car in high demand, for example, may sell for well above the MSRP. This is because the MSRP is the suggested retail price. A dealer doesn't have stick to this sticker. If our salesman at Eddie's Cars'n'Such thinks that customers will beat down his doors for the new Escalade, he may will jack up the price regardless of the advertised MSRP.
At the same time, dealers may often agree to prices below, even well below, the MSRP. In fact they usually do. The salesman might do this to move a car which hasn't sold, to clear the lot of last year's models or just to get you in the vehicle today. She also might do this, however, because many dealerships make most of their money on the secondary market.
The Secondary Market Can Drive Pricing
A licensed dealership will typically offer maintenance and parts at an attached auto shop. The value of having a consumer bring this car back again and again for oil changes, new tires and breaks, necessary repairs and routine maintenance can dwarf any profit the dealer makes on selling the car. A dealer will often give the customer a break (sometimes a substantial one) in anticipation of netting that ongoing business.
Be aware of this as a consumer. While negotiating the price of your new car you aren't just bargaining for a one-time purchase. You represent years of potential business, all of which will vanish if you walk out the door. This is the real money that your dealership is hoping to capture. Whatever they make by selling you the car is often just a bonus on top.
For this reason dealers aren't just willing to negotiate… They may often sell the car to you at a loss, anticipating that they'll make up the money in further business down the road.
Five Different Car Pricing Factors You Need To Know
When you buy a car through the dealership there are five price factors which define the entire transaction. Here, in a roughly chronological order, is each one:
As we've discussed, the recommended sticker price for the car. This is how the automaker advertises the car to the consumer.
2. Base Price
This is the suggested sticker price of the car without any bells and whistles. This is what a commercial refers to by "prices starting at…"
When an automaker sets the MSRP it does so on the assumption that you won't buy the most stripped down version of its car possible. So the suggested retail price is built around a midrange model, one which maybe includes Bluetooth but not the upgraded speakers for example.
Base price is the suggested retail price of a car with no options whatsoever. It's the cheapest profitable price that the automaker suggests selling this particular model at. You may not find it at every dealership though, because often dealers may not have a completely option-free version of a vehicle on the lot.
3. Invoice Price
This is the price that the dealer paid the automaker for the car, also typically known as factory price. It is typically thousands of dollars less than the MSRP. The difference between invoice price and MSRP is the dealer's estimated profit.
So, for example, if GM advertises a car for $20,000 MSRP, it might invoice the car dealer $17,000 for the vehicle. The dealership now anticipates making $3,000 on the sale.
Invoice is just the beginning of how a dealer pays for its cars, however, automakers need to move their products quickly, which can often be a problem for such a big ticket item. By way of example, General Motors produces about one new car per minute every day, all day. So to help dealers push those products they introduce programs like dealer holdbacks, rebates and other incentive programs all of which lower the factory cost of the car. This lets dealers bargain their prices down further, all in the hopes of getting you into the driver's seat.
4. Sale Price
This is the price that you ultimately end up agreeing to. The MSRP may be greater or less than this sale price depending on the market and your bargaining position.
To keep tracking our GM product, the dealership may advertise the car for $20,000 MSRP. It might invoice the dealer $17,000. The dealer may then give you a $19,500 sale price, cutting a deal off the MSRP to get you in this vehicle today.
5. Payment Price
But the sale price isn't necessarily what you'll pay. Your monthly payment is the payment price, and it can depend on a lot of additional factors.
MSRP and Payment Price
One of the worst tricks in a car salesman's book is the notorious "add-ons."
Once you agree to a sale price, the dealer will typically then explain all of the additional costs involved with buying this car. Some of them are necessary, such as interest on an auto loan. Some of them are helpful, such as a discounted service plan for annual maintenance.
Some of them are just inches shy of legalized theft, such as extended warranty plans. Do not buy the extended warranty. It almost never covers more than a decent car insurance policy.
Your final payment price will be the lump sum of all these additional costs plus the sale price of the car. For someone not buying the car with cash on hand, this payment price will then be split into monthly payments over a period of years.
True Market Value
Finally there's true market value. This is the average price that consumers are paying for this car right now. While it has long been used for pricing used cars, like the Kelly Blue Book value, its application to the new car market is relatively new.
The idea of a true market value is new because, up until recently, there's been little reliable data. Car dealerships didn't publish the details of every negotiated sale, so until auto websites began tracking this information it was largely confidential.
True market value will generally fall somewhere in between invoice and MSRP. While car sales float above and below MSRP depending on each individual negotiation, most sale prices trend below the suggested retail price. This metric is useful because it tells you, in a nutshell, what are people paying for this car?