The automotive world is full of acronyms. From mechanical phrases like 4WD (four-wheel drive) and AWD (all-wheel drive) to financing abbreviations such as APR (annual percentage rate) and DTI (debt-to-income), all of this jargon can get downright overwhelming. 

To add to the problem, car buyers often come across MSRP. But what is MSRP? Also known as the manufacturer's suggested retail price, MSRP seems fairly straightforward. But do you really know what it means? By learning the ins and outs of this term, you can get the best value and price on your next car purchase.

What Is MSRP Exactly?

As mentioned, MSRP is the manufacturer's suggested retail price that you'll see on the window of a new car. However, these terms are also interchangeable with list price and sticker price (which gets its name from the window sticker). 

Whatever you call it, MSRP 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:

Determine MSRP

After they've determined these figures, they also add on a fair value retail markup. The retail markup is the gross profit the dealership earns on the vehicle. 

Keep in mind 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, which is basically a commission for selling the vehicle.

How Does MSRP Affect the Car Buying Process?

They say a sucker is born every minute. And if you're paying the manufacturer's suggested retail price, chances are this saying might pertain to you. But it doesn't have to. MSRP is a price that often preys on first-time car shoppers or those with limited car buying experience. As a result, knowing what affects 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 in overly high demand. Instead, MSRP acts as a starting point for negotiations on a new vehicle. Follow the steps below to avoid paying MSRP and getting the best or lowest price for the car you want.

What is MSRP

The Monroney Label

Before you determine exactly what you'll pay for a vehicle, you'll first need to know a bit about the Monroney label. In Canada and the United States, the Monroney label — also known as 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 (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.

Keep in mind that Canadian law doesn't require a Monroney label on pre-owned and used cars. However, used cars may have a "buyer's guide," which is a window sticker that lists similar information.

Other Factors in MSRP

Although costs and markup are two of the biggest determinants of a vehicle's MSRP, don't forget about some of the 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 the MSRP. A general list of a higher-priced MSRP may also include:

  • Trim levels (base model vs. fully loaded)
  • Added options 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

How MSRP Impacts Budgeting, Financing, and Negotiating

Although you hopefully won't pay MSRP for your vehicle, it does play a vital role in the negotiation process. That's why you should pay attention to the MSRP. Not only does it give you a bargaining chip with the salesperson, but it can also save you money on monthly payments, leasing, and final pricing terms.

Using MSRP to Prepare a Budget

MSRP is an excellent starting point to prepare a budget for your vehicle. While you'll typically pay a lower price, the MSRP allows you to determine what cars will fit your total budget (if you're paying cash) or your monthly payments.

Before you browse the internet for the ultimate vehicle for a road trip to Nova Scotia or a head-turning sports car to cruise downtown Toronto, 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

If you aren't paying cash for the vehicle, you'll need to secure financing. And while credit history and debt-to-income 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 allows them to get a basic idea of what terms the loan will contain, 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 centers 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 price at a car dealership, that's typically where they'll begin.

That's why knowing the MSRP and the fair value off the top of your head is crucial. By memorizing these figures, you can go into the negotiations confident and well-read.

But the most important fact in the art of negotiation is this: 

Always find a rock-bottom price (fair price) and work your way up toward the MSRP. By doing so, you maintain control over negotiations rather than starting at the MSRP and working down.

In addition, you should also work these topics into the conversation:

Negotiating MSRP

Discuss these one at a time 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 play a huge role in 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 includes:

  • Our 7-day money-back guarantee
  • 3 month / 6,000 km warranty
  • Access to Clutch’s Trade-In Estimator
  • No-haggle pricing

So what is MSRP? It’s your key to getting the best possible price on your next vehicle purchase. Just make sure to conduct your due diligence, know your stuff, and you’ll be satisfied with the results.