MSRP: What it is, why it matters, how you can beat it.
MSRP: What it is, why it matters, how you can beat it.
28 July 2023 Concept Car
You’ve probably heard the term MSRP thrown around. But what does it mean, exactly?
It wouldn’t take us long to explain what the MSRP is. In fact, we’ll do just that in the very next paragraph.
So why did we decide to write an expansive article on the topic?
Because we feel that it can be extremely helpful to understand the basic concept behind the MSRP. It is especially important to know why the MSRP has remained stable, for example, while car prices continue to rise to absurd levels.
If you want to save money and be able to afford a great car, we strongly recommend you read more than just the next paragraph.
What is the MSRP?
The MSRP is the Manufacturer’s Suggested Retail Price.
When a car maker presents a new car to the public, it also announces the prices of the different trim levels.
So, let’s say Vauxhall launches a new Astra. Then it’s promotional materials will include the suggested prices for each variation.
However, with very few exceptions (here’s looking at you, Tesla) manufacturers do not sell their cars themselves. Dealers do. And they are free to charge as much as they like.
So can dealers charge more than the MSRP?
Absolutely. This is perfectly legal and the price you’ll actually pay can be both lower or higher than the MSRP.
It is just that for the past decades, this has hardly ever been the case. Rather, most drivers pretty much assumed that the MSRP was the starting point for negotiations. And those would typically lead to a discount.
This system was beneficial for all involved: The MSRP set an invisible line. By haggling, customers could bring it down a little, but it was understood that the actual price would always be close to the initial suggestion.
What is the problem with the MSRP at the moment?
The problem with the MSRP pretty much across all major markets, is that the price that most consumers pay is currently consistently higher than the suggested retail price.
Again, in theory, this should not come as a surprise. As long as supply is sufficient, dealers and drivers can pay less than the MSRP. But in times of demand far exceeding supply, the tables can turn. With new, extremely popular models, this has happened regularly in the past.
Never before, however, has the MSRP been so removed from reality as right now. Things have gone from “Nobody pays sticker price” to, “Everybody pays sticker price. Or more.” In the USA, “82.2% of all new-vehicle purchases were above the manufacturer’s suggested retail price, and the average purchase was $728 above MSRP, according to researchers at Edmunds.
For some, this means they simply can no longer afford a new car.
If not the MSRP, which price should you aim for?
Manufacturers are not amused by dealers consistently selling cars above MSRP. They have publicly scolded dealers and even gone as far as to call their behaviour “unethical.” That said, this has had very little actual effect on the prices charged.
From a pragmatic point of view, you could simply take the position that things have reversed: The MSRP is still the baseline, only this time dealers get to use it as a yardstick to set the actual price.
Unfortunately, that’s not what is truly happening. In reality, some models are far above the suggested retail price. Price increases of almost 50% are the exception, yes. But they’re not as uncommon as you’d think.
To understand which price you should aim for instead and what strategy to go with, let’s first take a look at the other prices that are commonly used in discussions.
What is the Base Price?
The base price is also an MSRP. It is, in fact, the MSRP for the lowest trim level available for a specific model.
So, if you are interested in a Dacia Duster and have to cut corners, the base level will tell you the entry price, i.e. the price excluding dealer fees for the model with the least extras.
Again, the actual price for this model on the lot need not be identical to this. Dealers can charge more for the lowest trim level than the base price – if only for the fact that many dealers will add specific accessories to the mix which raise the price beyond that of the base level.
What is the Invoice Price?
This is the price that the dealer pays the manufacturer. It is usually a few thousand Pounds lower than the MSRP.
The difference between the MSRP and the invoice price is the profit the dealership makes on a sale.
You would expect that, during haggling, you couldn’t go lower than the invoice price.
Funny enough, this is not the case.
Dealers make most of their profit from incentives (for exceeding a quota), sales bonuses (for each car sold) and financing (from interest paid). So they can, in theory, go lower than the invoice price.
If you step into a dealership at the right moment and with the right strategy, you can get a car well under invoice price. But it’s rare, admittedly. Also, you can not actually know the invoice price for sure.
It is good to know, however, that there is usually a lot more freedom for negotiations than you might think.
What is the Market Price?
The market price, the way it is usually defined, is the average price that consumers are actually paying for a model.
Often, websites like Edmunds or Parkers will calculate this price from talking to dealerships across the country.
The market price is the price you’ll see mentioned in newspaper articles dealing with the price rises in the UK and other countries. It gives you an impression on where the car market as a whole is moving towards.
The market price can be useful for statistical analyses. But many consumers misunderstand it, believing they can enter a dealership and demand the market price. However, this is never an actual price, but always just an average.
The actual price is what you pay for in the dealership of your choosing for the specific model you desire and occasionally combined with a trade-in. It depends on many factors which do not factor into the market price.
What can we expect in terms of the MSRP over the upcoming months?
Honestly, we wouldn’t expect dramatic changes anytime soon.
The logical conclusion from the past few months’ development would be for manufacturers to also raise the MSRP. Clearly, no one is paying any attention to it anymore. So why hold on to it?
The thing is that car makers are loathe to do. Why?
Because MSRPs have a long-term effect.
As long as the MSRP remains low, they can keep blaming dealers and instal hope in consumers that price levels will eventually come down again.
Dealers, on the other hand, have little choice but to keep demanding higher prices. They have suffered tremendous loss as a result of the lockdown. Also, demand is so heavily outstripping supply that it is all but impossible for prices not to reflect this.
Sure, some prices are exaggerated and need to come down. They will. But mostly, considering the current situation, we are witnessing a phenomenon that is fairly easy to explain.
Are there strategies that can help you pay the MSRP or come close to it?
A few have been suggested. But they can’t work any wonders:
Postpone your purchase: This is only a sensible strategy on a very long timeline. If you need a car soon or within the foreseeable future, this strategy could actually backfire. Inflation is still rampant and cars could get more expensive before getting any cheaper.
Check back regularly with dealers and use a geographically wider search: This is hardly a serious recommendation, as most of us do this anyway. Also, there is a limit to how far you can spread your wings. There is clearly no point in buying car with a dealer several hundred miles away.
Buy a model with a lower trim level: A sensible point. But even the most basic models are moving up in price. So don’t expect any miracles here.
Buy used: Definitely your best bet. Even if used car prices have been rising faster than new car prices, they still remain the better deal.
The actual core of the issue: Financing
There’s no denying it: Financing is the real issue. Most of us will be able to cope with price hikes as long as you can spread the loss out.
At CCC, we always look at what you can actually afford. We base our assessment not so much on your credit rating, but on your spendings, savings, fixed cost and income. Using this as a point of departure, we arrive at a monthly sum that is realistic and sustainable.
If you’re interested in a quote, get in touch with our team now. We look forward to hearing from you!