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The automotive landscape is chock-full of acronyms — to the point of becoming overwhelming sometimes. From AWD (all-wheel drive) to BEV (battery electric vehicle) to DOHC (dual-overhead cam), the alphabet soup seems virtually endless. But one acronym that’s been around for as long as the industry is MSRP, or manufacturer’s suggested retail price.
While it sounds simple enough, there’s a lot packed into an MSRP. So what is MSRP? Let’s unpack this complex four-letter acronym and see what it’s all about and what it means to you.
What Is MSRP Exactly?
As mentioned, MSRP means manufacturer's suggested retail price, which you’ll typically see on the window sticker of a new car at the dealership. You may also hear this term referred to as the list price or sticker price (which gets its name from the window sticker).
Whatever you call it, the manufacturer’s suggested price is a pricing model that car manufacturers use on new cars to ensure the price of the car remains constant across all markets. This protects the consumer and the automaker from potential price gouging from disreputable car dealers.
How Do Automakers Determine MSRP?
To determine the MSRP, automakers add together the following factors:
After determining these figures, they also add on a fair value retail markup. The retail markup is the gross profit margin the manufacturer expects the dealership to earn on the vehicle.
Remember that MSRP varies from the invoice price, which is the dealer cost (i.e., the amount a dealer pays the car manufacturer for the vehicle). Car dealerships may also get a holdback fee from automakers, a commission for selling the vehicle. With a holdback, you may only pay at or near invoice pricing, but the dealership still gets some profit.
Dealerships can also earn profit in other ways, such as commissions on financing and after-sales add-ons, such as extended warranties, paint protection, maintenance contracts, GAP insurance, and more.
How Does MSRP Affect the Car Buying Process?
While the MSRP may be presented as the actual price you have to pay for a new vehicle, this is often not the case. If you understand the new car marketplace, you can negotiate a better price that gets you closer to the car’s invoice price. Understanding what impacts the MSRP is essential to:
- Understand market value
- Negotiate to get the lowest price
- Help your trade-in value
- Figure a fair final price of the vehicle
Is MSRP What You'll Pay for a Vehicle?
In most cases, you won't pay MSRP for a vehicle if you conduct proper research and the car isn't a popular model in high demand. Instead, MSRP is useful for building your negotiation strategy for a new vehicle.
Follow the tips below to avoid paying MSRP and get the best or lowest vehicle price.
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Understand the Monroney Label
Before determining exactly what you'll pay for a vehicle, you'll need to know a bit about the Monroney label. In Canada and the United States, the Monroney label — the window sticker — contains all the relevant information on why the MSRP is what it is. Take a glance at the label, and you'll notice:
- MSRP
- Base price (price before fees and extras)
- Standard equipment and any trim level upgrades or options
- Safety ratings
- Fuel economy
- Engine displacement (four-cylinder, V6, etc.)
- Tax information
- Destination charge or destination fee (a non-negotiable fee charged by car dealers)
- Warranty information
You may also find information about the manufacturing process, especially if 15% or more of the manufacturing process or raw materials came from overseas.
Remember that Canadian law doesn't require a Monroney label on pre-owned and used cars. However, used cars may have a "buyer's guide," the car’s window sticker listing similar information.
Knowing Other Factors That Affect MSRP
Although costs and markup play the biggest roles in a vehicle's MSRP, don't forget about some other factors. Do you love the caress of leather or the warmth of a heated steering wheel? That's all going to raise the selling price and MSRP. Other items that can increase the MSRP may also include:
- Trim levels (base model vs. fully loaded)
- Additional features or packages (leather, surround sound, alloy wheels, etc.)
- Engine upgrades, such as a turbocharger or a V8 vs. V6
- All-wheel drive or four-wheel drive
Look for Available Incentives
Keep in mind that incentives are still common in the automotive industry. This includes everything from college graduate rebates from automakers to federal electric and plug-in hybrid vehicle incentives. You won’t find these incentives worked into the MSRP. Instead, the dealership will discount them when performing the financing.
Watch the numbers carefully to ensure the dealer isn’t inflating the MSRP and then adding the rebates. Also, watch out for them using the rebates to reach your desired selling price. The dealer gets this rebate from the manufacturer, so they should discount the selling price to what you agreed to and then add any rebates.
For example, if you are looking at a vehicle with a $25,000 MSRP and negotiate a $24,000 selling price, but there’s still a $1,000 manufacturer’s rebate, your final price should be $23,000 after the rebate. Some dealers may attempt to use the rebate to reach your negotiated price, so they are still technically selling the vehicle at MSRP. This means they are getting the benefits of the rebate instead of you.
Market Adjustments
You also have to keep in mind that sometimes dealerships work upward from MSRP. This generally only happens with high-demand models, such as when the new mid-engine Corvette arrived. This model was so popular that dealerships added significant market adjustments to the MSRP and made thousands more profit than the manufacturer intended.
How MSRP Impacts Budgeting, Financing, and Negotiating
Although you hopefully won't pay MSRP for your vehicle, it plays a vital role in the negotiation process. That's why you should pay attention to the MSRP. It gives you a bargaining chip with the salesperson and can save money on monthly payments, leasing, and final pricing terms.
Using MSRP to Prepare a Budget
While you’ll typically pay less than MSRP for a car, it remains a good way to determine your budget.
If you’re paying cash, use the MSRP to determine your top-level budget. If you plan to finance the vehicle, use the MSRP to determine affordable monthly payments. If you get a lower MSRP, that just means bigger savings for you in the end.
Before you browse the internet for the ultimate vehicle, keep the MSRP in mind. Not only will this keep you financially responsible, but it will also help you avoid disappointment.
MSRP and How It Works With Financing and Leasing
You'll need to secure financing if you aren't paying cash for the vehicle. And while credit history and debt-to-income (DTI) ratio are important, the MSRP is also integral. When a lender analyzes your loan application, they'll also want the MSRP to determine if you can afford it or if they're willing to finance it.
Loan officers know you won't pay this price. But the MSRP gives them a basic idea of the loan terms, including loan length and interest rate. It also allows them to grant pre-approval so you can have a starting point for your car shopping.
Leasing a vehicle centres around the MSRP, as the price can adversely affect your monthly payments or down payment. Because you're leasing, the MSRP is non-negotiable. However, you can negotiate a down payment based on the MSRP to lower your monthly lease payments.
MSRP and Negotiating the Best Price
As much as MSRP is a starting point for you, it's also a starting point for salespeople. Any time you negotiate a purchase price at a car dealership, they typically want to start at the MSRP.
That's why knowing the MSRP and the fair value off the top of your head is crucial. By memorizing these figures, you can enter the negotiations confident and well-read.
But the most crucial fact in the art of negotiation is this:
Always find a rock-bottom sale price (fair price) and work toward the MSRP. This lets you control negotiations rather than starting at the MSRP and working down. You're at a big disadvantage if you allow the salesperson to start right at MSRP.
In addition, you should also work these topics into the conversation:
Discuss these individually to keep the conversation flowing and remove any gray areas. And don't forget: you can always walk away.
It’s Time to Improve Your Car Buying Experience
If you're considering a pre-owned or used car instead of a new vehicle, you may find that the MSRP doesn’t shed any light on its market value. Mileage and condition greatly affect the value and price you pay. But Clutch's online car buying experience should help ease some of this hassle.
Every car in Clutch's inventory has transparent, no-haggle pricing and includes our 10-day or 750-km money-back guarantee. If you don’t love your Clutch vehicle within that period, you can return or exchange it, no questions asked. We also add more peace of mind with our 210-point vehicle inspection and reconditioning process and 90-day or 6,000-km limited warranty.
If you have a trade-in vehicle, you can get a firm offer with Clutch’s Trade-In Estimator. If you decide not to buy from Clutch, you can also use this estimator to get a cash offer for your vehicle.
So what is MSRP? It’s your key to getting the best possible price on your next vehicle purchase. Make sure to conduct your due diligence, know your stuff, and you’ll be satisfied with the results.
