MSRP and Dealer Mark-Ups Explained

We explain what MSRP means and doesn’t mean in today’s market, and how it will affect your next car purchase.

A Changing World

MSRP or Manufacturer Suggested Retail Price a.k.a. the “sticker price” of a vehicle was a worst-case car buying scenario. One could reasonably expect the price displayed in the window of a car on a dealer’s lot to be the starting place for negotiations, with you, the buyer, expecting to whittle down that number to some kind of “good deal.”

Today’s automotive market continues to reel from a persistent microchip shortage and related supply-chain issues that have depressed vehicle production and raised prices for both new and used vehicles. Where MSRP was once the upper limit on what you’d be looking to pay for a new car, given the imbalance between supply (low) and demand (robust), today dealers across the country are happily tacking on “market adjustments” in the thousands of dollars beyond MSRP.

Invoice vs MSRP

That’s why it’s important to remember the “suggested” part of a Manufacturer Suggested Retail Price. Dealers are not necessarily beholden to an MSRP, though chronic or egregious mark-ups can draw fire from the manufacturer (which we saw recently when Ford formally asked dealers to cool it on their Ford F-150 Lightning pre-order mark-ups). The standard factory warranty and destination fee, that is the cost of transporting and prepping the vehicle for sale, are usually bundled with the MSRP.

Typically, dealers pay an invoice cost to the manufacturer for a vehicle they intend to sell. They then list that vehicle at the MSRP or higher, with the difference between the invoice and the MSRP or final sale price being the dealer’s profit margin. There’s also often a “holdback” price that is a kickback to dealers from the manufacturer once the vehicle has sold. This ensures dealers can still make a profit even if they sell a vehicle at the invoice cost.

Other Fees and Out-the-Door Prices

2020 Chevrolet Corvette C8 - netcarshow.com

For high-demand or scarce vehicles, dealers will often add a “market adjustment” to the MSRP. In today’s market of chronically tight inventories, large market adjustments are becoming more and more common on desirable vehicles. For example, take the Chevrolet Corvette C8.

Back in 2020, when Chevy was struggling to get C8s through production, prices were inflated by tens of thousands over the much-publicized MSRP of $60,000-$70,000 (depending on options). But today, with GM having worked out the production kinks, you’re much more likely to get a deal on a C8. Knowing whether the vehicle they’re looking at is a current hot commodity can go a long way toward explaining prices far exceeding MSRP.

Toyota 4Runner with roof rack - toyota.com

Additional fees beyond the MSPR may be included for non-factory items like off-road tires, roof racks, and other dealer add-ons as well as for paperwork processing, cleaning and detailing, and even manufacturer advertising. While many of these former fees can be negotiated with the dealer, they make it especially important to emphasize the final out-the-door price of your purchase, not just the sticker price.

Today’s Market and Negotiating

Under normal circumstances, buyers should be negotiating from the dealer’s invoice cost and asking the dealer to justify their profit margin up to the MSRP. But today’s market isn’t normal and MSRP is often being considered the baseline for a “good deal,” at least from the dealers’ perspective. Remember, dealers are only applying exorbitant mark-ups on desirable rides like the Kia Telluride or the Ford Maverick because car buyers are paying those prices.

This doesn’t mean you need doom yourself to paying above MSRP on your next new car, however. One consistent bit of car buying advice is always to do your research. Know where the market is at for a particular vehicle you’re looking at, both nationally and regionally. This will help you at least avoid the worst mark-ups above MSRP. And if you’re wise enough or lucky enough to be shopping for something that isn’t especially scarce, you’ll be in a much better position to negotiate up from the invoice cost rather than trying to work down to the MSRP.

For more advice about negotiating on your next vehicle purchase click here.