Great question. MSRP stands for Manufacturer’s Suggested Retail Price. This is the price set by the manufacturer for the particular vehicle, trim, and options. It is also called “sticker price” because the MSRP is what is shown on the car’s window sticker.
Invoice Price, also called “wholesale price,” factory invoice price,” or “dealer invoice price,” is what dealers pay the manufacturer for the particular vehicle. All dealers pay the same price for the identical vehicle, trim, and options. In other words, the vehicle has a base price (depending on trim, such as base model, mid-level, or top-of-the-line model), plus additional options. These are all reflected in the bottom-line invoice price the dealer pays the manufacturer.
Note that there is often considerable difference between the MSRP and invoice price. The difference is the dealer’s potential profit margin. Dealers also have costs associated with buying vehicles from the manufacturer. They generally have to pay national or regional advertising fees (for TV and newspaper ads), and interest on the loans (“floorplanning”) they use to buy the vehicles from the manufacturer. The longer a vehicle stays on the dealer’s lot, the more interest the dealer has to pay on it.
Dealers also have the typical costs of running a business, including employee salaries, rent, utilities, and taxes. But there are other factors that come into play when dealers price vehicles. Some vehicles that are extremely popular or are limited production may be priced higher than MSRP (supply and demand principle). Others that dealers need to clear from their inventory may be priced lower than invoice price. Usually, the selling price is somewhere in-between the two and takes into account other factors. These include geographic location and city size, the particular make and model, time of year, individual dealer, competition, time of the month or year, available incentives or promotions, and the buyer’s negotiating skills.
So, how do you make sense of the MSRP versus invoice price when looking at a particular vehicle at the dealership? First, remember that dealers are in business to make money, and, just like any other business, are entitled to make a decent profit. Therefore, you should not expect or demand to pay invoice price for a vehicle. A good strategy for savvy consumers is to always negotiate from invoice price up, not MSRP down.
For a detailed look at how car pricing works, see the explanation at LeaseGuide.com. To improve your car negotiating skills, see the Edmunds article, “Knowing the Numbers to Improve Your Negotiating Skills,” and our postings on “Tips on Negotiating a Great Car Deal”, “10 Steps to Getting a Great Deal on a New Car”, and “Top 10 Car Dealership Tricks”. With Edmunds True Market Value (TMV) printout in hand, you should be able to successfully navigate the buying process. According to the site, “TMV is an indicator of how desirable a car is, and is determined by the demand for a given model and the available supply in your local marketplace.” TMV helps you know what others have paid for this car and is, therefore, a transaction price.