Those who shop for a new car at a dealership probably notice a price indicated as “MSRP.” Short for “manufacturer’s suggested retail price,” MSRP represents the price at which a manufacturer recommends its product should be sold.
What Is MSRP (Manufacturer’s Suggested Retail Price)?
MSRP (manufacturer’s suggested retail price) is a pricing guideline that the manufacturer recommends its product be sold at in stores. It isn’t necessarily the actual sale price of the item—retailers may choose to sell it for more or less, depending on their own business model and pricing strategies.
MSRP is also referred to as “list price,” which is the price at which a product is advertised. It is a price set by the factory, not the car dealer.
Due to franchise laws in the automobile industry, the dealer can choose to sell the car for more or less than the MSRP. The automaker sets the MSRP as the preferred selling price for the car.
While the MSRP itself is not required by law, displaying it on new cars sold in the United States is mandated by the Monroney sticker (i.e., the window sticker). The Monroney sticker’s requirement stems from the Automobile Information Disclosure Act of 1958, named after its author, Senator Mike Monroney of Oklahoma.
This requirement helps customers compare the purchase price against other models or dealerships, benchmark their own negotiation power, and protect themselves from being overcharged.
- Manufacturer pricing
- Sticker price
- List price
Purpose of the MSRP in Automotive Sales
Although the MSRP is nothing more than a price suggestion from the auto manufacturer, it serves a few important purposes.
1. Gives retailers a profit margin
At its core, the MSRP is intended to help retailers maintain profitability.
It is different from the dealer cost (i.e., the invoice price, or what the dealer pays for the car). Since the dealer must pay this cost to obtain the car, they might lose money if they don’t sell it at MSRP or above.
The size of the gap between MSRP and dealer cost varies, depending on demand and market conditions.
2. Promotes fair competition
MSRP facilitates fair competition among dealerships by giving them a standard reference price. This ensures that all dealerships have access to the same pricing information, which levels the playing field and encourages healthy competition.
As a result, customers can expect competitive prices across different dealerships.
For car manufacturers, this pricing system ensures dealerships don’t over-compete or adopt a race-to-the-bottom approach, which would put tremendous strain on the auto industry (a competitive industry with an average net profit margin of only 5.73%).
3. Improves the perceived value of each product
Price elasticity is high in the automotive industry. With such high competition and the ready availability of substitutes, customers are quite sensitive to price.
By setting an MSRP, manufacturers maintain the perceived value of their vehicles by establishing transparency with the buyer and a reasonable expectation for the price.
4. Protects buyers
The Automobile Information Disclosure Act was enacted to provide consumers with standardized, detailed, and easily accessible information on new vehicles. This legislation aimed to address deceptive trade practices, promote transparency, and protect consumers from being misled or overcharged.
Prior to this law, automobile dealerships had the freedom to set prices without disclosing any reference point, which led to inconsistencies, confusion, and potential exploitation of customers.
The lack of transparency in pricing practices made it difficult for consumers to compare prices and make informed decisions when purchasing a vehicle.
How MSRPs Are Determined
The process an auto manufacturer goes through when determining MSRP has several moving parts.
Let’s take a look at how MSRPs are determined.
How to Calculate MSRP
In its simplest form, the MSRP calculation is as follows:
MSRP = Manufacturer's Cost + Manufacturing Cost + Distribution & Delivery Fees + Profits
For example, if a manufacturer’s cost is $15,000, their manufacturing cost is $3,000, the distribution and delivery fees are $500, and their desired profit margin is 15%, then the MSRP would be:
MSRP = $15,000 + $3,000 + $500 + (15% of ($15,000 + $3,000 + $500))
MSRP = $19,325
Factors Influencing MSRP
A vehicle’s MSRP includes the base price of its specific trim level, along with the prices of any additional features, packages, or upgrades it has.
These are normally itemized, and it’s mentioned whether they are included or will have an extra cost above the base model.
The price also includes the standard factory warranty and service coverage.
Market demand is one of the most essential factors that contribute to setting MSRPs. When demand for a car is high, the manufacturer will suggest a higher selling price and vice versa.
The reason for this is simple: a higher demand for the vehicle increases its perceived value and therefore allows manufacturers to command a higher price.
Manufacturers also take their competitive market positioning into consideration when setting MSRPs.
For example, if a manufacturer’s vehicles are considered entry-level models, they will need to ensure their prices stay competitive to remain attractive to their target customers.
Materials and Labor
Materials and labor affect the wholesale price of the car, so it’s important for manufacturers to consider these costs when determining MSRP.
- Manufacturing costs depend on various factors, such as the type of materials used, complexity of construction and assembly, labor hours required to produce the car, and more.
- The cost of hiring and paying employees varies depending on what region of the world the car is being produced in and whether or not they increase their wages over time.
- Raw materials and individual parts cost different amounts depending on the quantity ordered, their availability, and the manufacturer’s relationship with the vendor.
The cost of producing a car also depends on the order quantity. Ordering in bulk usually yields better wholesale prices, but ordering more only makes sense if the manufacturer can guarantee sufficient sales to justify larger orders.
When an automaker orders more vehicles from its suppliers or factories, it can often lower its production costs, resulting in a reduced MSRP for customers.
Also called “destination charges,” the cost of transporting cars from their place of manufacture to the dealership is a major factor that affects MSRP.
Due to high transportation costs, dealerships located in rural or far-off areas will typically have higher MSRPs than those located closer to manufacturing hubs.
That said, even retailers near manufacturing facilities pay a destination fee.
The markup is the profit margin the manufacturer or dealership has built into their MSRP. Generally, this is a fixed percentage but can vary depending on the car model and the dealer’s pricing strategy.
Manufacturers usually set a minimum markup for each vehicle model to ensure adequate profits, limiting dealers’ ability to negotiate further discounts with customers.
Base Price vs. Invoice Price vs. MSRP
Differentiating between base price, invoice price, and MSRP is important for anyone looking to purchase a car.
The base price refers to the cost of a vehicle in its most basic configuration, without any added options or features. It is the starting point for building and customizing a vehicle to meet a buyer’s specific preferences.
Base model pricing typically includes the vehicle’s standard features, such as the engine, transmission, and essential safety equipment, but it excludes any optional extras, taxes, or fees.
The invoice price is the amount the dealership pays to the manufacturer for a vehicle. It is typically lower than the MSRP, as it does not include dealer markups, advertising fees, or any potential profit margin.
In some cases, the invoice price may also include sales discounts or incentives provided by the manufacturer to the dealership. While the invoice price is not commonly disclosed to consumers, it can be helpful in negotiations if you have access to this information.
MSRP (Manufacturer’s Suggested Retail Price)
As discussed, the MSRP is the price recommended by the manufacturer for a product to be sold in stores. It serves as a reference point for consumers and dealerships and is displayed on the Monroney sticker on new vehicles.
The MSRP includes the cost of the base model and any add-ons or optional features.
Advantages and Disadvantages of Suggested Retail Price
There are good and bad aspects to the MSRP system. On one hand, it gives customers a reference point for comparison-shopping and helps protect them from being overcharged.
On the other hand, some manufacturers set unreasonably high MSRPs in order to inflate their profits or make their vehicles appear more valuable than they really are. This can lead to
Benefits of MSRPs
MRSPs protect manufacturers, dealers selling retail products, and buyers, making them beneficial to everyone in the sales process.
- Consistency: MSRP provides a consistent reference point for comparing prices across different retailers and products.
- Fair competition: By suggesting a common retail price, MSRP encourages fair competition among retailers and helps prevent price gouging.
- Simplified negotiations: MSRP serves as a starting point for negotiations between buyers and sellers, making the process more straightforward for both parties.
- Brand image protection: Manufacturers can maintain the perceived value and reputation of their products by suggesting a consistent retail price.
- Consumer trust: Displaying the suggested retail price can help build consumer trust by promoting transparency in pricing.
Drawbacks of MSRPs
Suggested retail prices are meant to ensure transparency for the buyer and profitability for the dealer, but there are a few problems with this model as well.
- Limited flexibility: Rigid adherence to the MSRP may limit a retailer’s ability to adjust prices in response to market conditions or individual business needs.
- Perceived inflexibility: Consumers may perceive the MSRP as a fixed price, limiting their willingness to negotiate or seek better deals.
- Price anchoring: The suggested price might create a psychological anchor, leading consumers to perceive higher-priced products as more valuable, even if the actual quality or features do not justify the price difference.
- Potential for collusion: In some cases, manufacturers may use the MSRP as a means to coordinate pricing across the industry, potentially leading to anti-competitive practices.
- Inaccurate representation of final cost: The MSRP does not include add-ons, which result in a final purchase price that is higher than the suggested retail price.
Technology Trends in the Auto Industry
On a macro level, autonomous vehicles, artificial intelligence (AI), electrification, and the Internet of Things (IoT) have the biggest current and future impact on the auto industry.
In a business context, automakers increasingly rely on digital tools, such as virtual showrooms and online car configurators, to engage customers and drive sales.
An automotive CRM is a software tool that combines customer service, sales, and marketing functions to enhance the car buying process.
It integrates with Dealer Management Systems (DMS), and all customer data can be stored in one centralized location.
Car sales is inherently complex. CPQ software makes it easy for care salespeople to sell quickly and effectively.
A product configurator (a common feature of CPQ software) allows customers to customize their order, while CPQ automatically calculates prices and discounts.
Since car sales is largely a quote-based process, CPQ ensures retailers effectively manage their quotes, monitor deal progress, and close sales as quickly as possible.
Most new customers either lease or finance their vehicles. To make it easier to manage billing and payment, many dealers now use automated billing solutions that integrate with their existing software or CRM.
Billing software streamlines the billing process by automatically generating invoices, sending reminders for overdue payments, and providing robust reporting capabilities.
People Also Ask
Is MSRP the price you pay?
The MSRP is not the price shoppers pay for their new vehicles. It is the manufacturer’s suggested retail price, which is a recommendation set by the manufacturer to foster price transparency and ensure profitability for the dealer.
Is MSRP the same as the selling price?
Dealers are not required to set their prices according to the MSRP. Cash rebates, incentives, and special offers may reduce the selling price below the MSRP. Consumers should negotiate with the dealer to get a better price.
Is MSRP higher than the dealer price?
MSRP is always higher than the dealer price because the dealer needs to sell the vehicle for a profit. Dealers may offer discounts and incentives to attract customers, lowering the final purchase price. But these initiatives come at the expense of the seller’s profit margin.
Can stores sell above MSRP?
Stores can (and do) sell above the MSRP, but customers usually don’t respond well to it. To remain competitive and protect their brand reputation, retailers should be careful not to set prices too high, especially considering the relative competition in the auto industry.