Buying a car can be confounding — especially when numbers and acronyms start flying about. All you wanted was the red convertible, but instead, you get a lesson in how much you really know about buying and financing a car. By the end of the sale, it’s easy to get lost in the details and lose focus on what it all means for you. One acronym that you’ll likely hear is “MSRP.” While it sounds like an ingredient on the side of a cereal box, MSRP is a financial term that’s important to understand and differentiate from others you’ll hear, such as a “base price” and “invoice price.”
What Is The MSRP?
MSRP stands for “Manufacturer’s Suggested Retail Price.” For instance, if a car company sells one of its cars to the dealership for $23,000 — and the company suggest that the dealership sell it for $26,000 — the MSRP is $26,000. MSRPs are not exclusive to the car world. Most stores receive MSRPs for goods they purchase from suppliers. You may not be aware of the MSRP for jeans that you’ve purchased at the store, but the clothing manufacturer definitely gave one to the store. Due to the haggling nature of the car industry, the MSRP has taken on a significant role in the sales negotiating process. Why? Because car dealerships are not required to sell a car at the manufacturer’s suggested retail price. Depending on the circumstances, dealers may try to sell the car at a different price than suggested by the car company. The MSRP is a starting point for price negotiations, and it helps you and the dealer understand how much car manufacturers value their cars.
What Are the Problems With MSRP?
The MSRP is a convenient way to begin price negotiations. It serves as the starting place to talk about the value of a particular car to both the dealer and the buyer. But not all cars are worth the same in all places, at all times. In a poor economy, car sales tend to drop, which means dealers will likely have to reduce their prices to continue making sales. Likewise, in a booming economy, a car’s branding may be worth more to the buyer as a status symbol than the machinery is to the car company. Moreover, trucks are more valuable in areas ruled by blue-collared industries, while energy efficient cars are popular in big cities that are primarily white-collar. While in negotiations, both car buyer and dealer need to recognize the socioeconomic factors that may be involved and adjust their price expectations according to the reality of the situation.
Base Price vs. MSRP
The base price usually refers to one of two things. The first thing the base price could be is the value of the lowest-priced version of a car. Let’s say a car company has a car model that comes in two different versions. The MSRP on the Model 1 may be $26,000, but the base price for the less flashy Model 2 could be $20,000 or less. The base price can also refer to the cost of a specific model without any options. This is an important distinction because the MSRP refers to the value of a car as it sits in the dealership. The base price usually does not include destination charges. Comparing the base price with the MSRP can help you get a sense for how much a car model’s options are valued by the dealer.
Invoice Price vs. MSRP
In the previous example, the MSRP for the Model 1 is $26,000 and the baseline is $20,000 or less, depending on options. So, what’s the invoice price? The invoice price is the money the dealership spends to buy a car from the manufacturer. The dealership buys Model 1 for $23,000. Knowing the invoice price is useful because it tells you how much the dealership stands to gain from the purchase. It can also give you an idea of how much wiggle room you may have to negotiate the price down.
Making the Complicated Simple
Negotiating prices can be tough, especially if you don’t know what everything means. AutoGravity empowers you to make better purchases and wade through the mess of numbers and other factors that make buying a car intimidating.