When shopping for a new car, you’ll likely come across the term MSRP frequently, which most know as the sticker price.
But what exactly does the sticker price represent, and how does it impact the price you eventually end up paying for a car?
MSRP (Sticker Price) Meaning?
MSRP stands for Manufacturer’s Suggested Retail Price.
It’s the price that the car manufacturer recommends dealerships sell a particular vehicle for, which is the price that the dealer should use to sell the car.
The MSRP includes the base price of the vehicle plus any optional features or packages.
Example MSRP Calculation
Let’s break down a sample MSRP calculation to illustrate how base price, options, and fees contribute to the final price:
| Component | Price |
|---|---|
| Base Price | $25,000 |
| Destination Charge | $995 |
| Premium Audio System | $1,200 |
| Leather Seats | $1,500 |
| Advanced Safety Package | $1,800 |
| MSRP | $30,495 |
In this example, the MSRP is the sum of the base price ($25,000), the destination charge ($995), and the prices of the selected options ($1,200 + $1,500 + $1,800).
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Table of Contents
The Purpose of MSRPs
The MSRP serves several important purposes in the car shopping process:
- It provides a standardized pricing benchmark for consumers, allowing them to compare prices across different dealerships.
- It helps maintain the perceived value and brand image of the vehicle, even for a used car.
- It gives dealerships a reference point for pricing and profitability, considering the price that the dealer paid for the vehicle.
While the MSRP is a “suggested” price, it plays a key role in price negotiations between the buyer and the dealership.
Base Price
Definition of Base Price
The base price is the cost of a new vehicle without any optional features, packages, upgrades, or additional charges like sales tax. It will always be less than the MSRP and represents the starting point for the most basic version or trim level of a car.
How is the Suggested Retail Price Calculated?
The manufacturer determines the MSRP based on several factors:
- The cost of manufacturing the vehicle, including parts and labor, and the price that the dealer paid for the vehicle
- Market conditions, consumer demand for the vehicle, and whether the vehicle is in high demand
- Competitor pricing for similar vehicles
- The manufacturer’s desired profit margin
- Optional features and packages included in the MSRP
The MSRP is designed to allow all parties involved – the manufacturer, the dealership, and the buyer – to make a reasonable profit.
MSRP vs. Invoice Price and Other Prices
It’s important to understand how MSRP differs from other prices you may encounter during the car shopping process:
| Term | Definition | Relationship to MSRP |
|---|---|---|
| Base Price | The cost of the vehicle without any options or fees | MSRP includes base price plus options and fees |
| Invoice Price | The price the dealership pays the manufacturer for the vehicle | Typically lower than MSRP |
| Dealer Price | The final price the dealership sells the vehicle for, after negotiations | Can be higher or lower than MSRP depending on market conditions |
| Market Value | The average price paid for the vehicle based on actual sales data | May differ from MSRP based on demand and availability |
| Destination Charge | The fee for transporting the vehicle from the factory to the dealership | Included in the MSRP |
In general, the MSRP serves as the starting point for price negotiations, with the final price falling somewhere between the invoice price and what you see on the sticker.
Dealer Holdback and Its Relationship to MSRP
What is Dealer Holdback?
- Dealer holdback is a payment from the car manufacturer to the dealership for each new vehicle sold.
- It is typically calculated as 1-3% of either the MSRP or the invoice price.
- For example, a car with an MSRP of $50,000 and a 3% holdback means the dealer receives $1,500 from the manufacturer upon sale.
Purpose of Dealer Holdback
- Allows dealerships to advertise vehicles at or near the invoice price while still making a profit.
- Supplements dealer cash flow and helps cover operating expenses like rent, salaries, and inventory.
- Reduces sales commissions by elevating the dealership’s paper cost on the vehicle.
Holdback and MSRP
- MSRP (Manufacturer’s Suggested Retail Price) includes the base price, options, and destination fees.
- Dealer holdback is not included in the MSRP shown on the vehicle’s window sticker.
- Holdback is often a percentage of the MSRP, so a higher MSRP means more holdback money for the dealer.
Negotiating with Holdback Knowledge
- Knowing about holdback provides leverage since the dealer’s actual cost is lower than the invoice price shown.
- Experts advise against directly negotiating the holdback amount, as dealers are unlikely to relinquish this money.
- Use your awareness of holdback to counter claims that the dealer isn’t making money and focus on negotiating the total sale price.
Negotiating MSRP on a New Car
While the MSRP is a “suggested” price, that doesn’t mean it’s non-negotiable. In fact, negotiating the price is an expected part of the car shopping process. Here are some tips for getting the best deal:
- Research the market value of the vehicle to determine a fair price, considering factors like sales tax and whether the vehicle is in high demand.
- Get price quotes from multiple dealerships to encourage competition.
- Look for manufacturer incentives and rebates that can lower the effective price.
- Be willing to walk away if the dealership won’t meet your target price.
Keep in mind that highly sought-after vehicles may have less room for negotiation, while slower-selling models may have more price flexibility.
MSRP and Dealer Practices
Dealerships have a lot of leeway in how they price vehicles in relation to MSRP.
In a normal market, it’s common for dealerships to sell the car below MSRP.
However, in a hot market with low inventory and high demand, some dealerships may price vehicles above MSRP.
For example: The new Cadillac CT5-V has been selling at 20% above sticker price!
This “market adjustment” is legal but can be frustrating when you’re buying a car.
If you encounter a dealership charging above MSRP, you may want to expand your search and look for better deals elsewhere.
Regional Variations in MSRP
The MSRP for a particular make and model is typically consistent across different regions and dealerships.
However, the actual sale price can vary quite a bit based on local market conditions and whether the vehicle is in high demand.
Factors like vehicle popularity, inventory levels, and local competition can all influence how much wiggle room there is in relation to MSRP.
As a car buyer, I will always suggest you shop around and see which dealerships offer the most competitive pricing.
Manufacturer Influence on MSRP
Car manufacturers put a lot of thought into determining MSRP.
Beyond just covering costs and making a profit, the MSRP is used to position the vehicle within the market and define the brand’s image.
If a vehicle is priced too low, it may be perceived as low quality, even if it’s a used car. Price it too high and it may scare away potential buyers.
Manufacturers aim to strike a balance with MSRP to maximize both sales volume and profitability.
