Q: What is MSRP?

December 17, 2013 12:53 PM

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When purchasing a car, one of the first things most customers look at is the price of the vehicle displayed on its window. This price is known as the manufacturer's suggested retail price or MSRP. It is the value of the vehicle that its maker feels represents the vehicle's worth. It's typically printed on a sticker along with the vehicle's features, and it is often referred to as the car's sticker price. Though this is the recommended price of the vehicle, few vehicles are actually sold at sticker price.

The first thing any consumer should know about the MSRP is that it has no link to the market value of the car. It does not represent the labor and materials that have gone into manufacturing the car or even the addition of an acceptable profit after production for the car. What it represents is the price that the manufacturer would ideally like the dealer to sell the car for, but cannot expect the dealer to receive for most vehicle sales. Few cars actually sell for the sticker price, making it primarily a first step in the negotiation phase of the purchase of a vehicle.

The history of the MSRP goes back to an act sponsored by an Oklahoma Senator in 1958, the Automobile Information Disclosure Act of 1958. Senator Almer Stillwell Monroney felt that consumers needed additional protection when purchasing an automobile and helped to pass legislation that required new vehicles to display detailed information about the car on that car's window sticker, including the MSRP. The MSRP would then create a common price for a specific make and model of the automobile across the country, preventing the same car from selling at different prices depending on the dealer.

In time however, the MSRP became more of a marketing scheme. Because MSRP was only "suggested," car prices remained negotiable. For buyers, MSRP began serving as a starting point, with buyers attempting to pay as far below the listed price as possible. This gave the buyer a sense of accomplishment at making a great deal, and allowed the dealer to still make a profit over the actual dealer cost of the vehicle.

When negotiating the price of a vehicle, this actual dealer cost is closer to the rock-bottom price that the buyer can obtain. Unfortunately, the dealer cost is generally not known, and the same vehicle model can have different dealer costs depending on which dealer makes the car purchase. Generally, the dealer's cost is somewhere below the car's invoice price, because the invoice price leaves out the holdback discount given to dealers to cover the financing costs of vehicles as well as any payouts received from manufacturers to sell specific models. There are also savings derived from continuing to sell the previous year's models up to the point where the new models are made available, as well as volume sales discounts and customer-satisfaction bonuses.

Further confusing the actual pricing of a vehicle are the various car options available at the time of purchase. These car options can be anything from custom wheels to stereo systems, with some options capable of raising a vehicle's price significantly.

For best results in negotiating a purchase price, it is best to simply ignore the MSRP. Shop around at multiple dealers and create a bidding war for your business. By allowing the dealers to compete against one another, you're more likely to receive a price that is closer to the dealer's cost than if you try to guess how inflated the MSRP may actually be for the specific make and model you wish to buy.

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