Buying a Car: What's an MSRP?

If you're interested in buying a car and you've done any research online, it's likely that the term MSRP has come up. You might know this stands for manufacturer's suggested retail price, but what does that mean? We have the answer, and we've defined a few other pricing-related terms so you'll be armed with knowledge when you visit a dealership.

MSRP: What Does It Mean?

The MSRP, or manufacturer's suggested retail price, is quite simply the price that the manufacturer suggests that the dealer should ask for a car. This is also referred to as the retail price, or the dollar amount that a retailer should be asking for the car according to the automaker. Think of it as the car-dealer version of the price tag you see on a television at an electronics store.

Although the MSRP is the suggested price, dealers have the freedom to ask more or less than this figure. If a car is in high demand, a dealer might include a market adjustment, which will increase the vehicle's price beyond the suggested price. The dealer can do this because they feel that the market demand is high enough to ask for more than the suggested price of the car.

Of course, dealers can also charge less than the suggested price for a car. In fact, the suggested price is typically a starting point for negotiations, and in many cases, customers insist on paying less than the MSRP. Dealers have the authority to make these changes to the car's final selling price because a suggested price is merely that -- a suggestion. It's ultimately up to dealers to decide whether they want to follow it.

Base Price: What Does It Mean?

So what's the difference between the base price and the MSRP? The answer is that the base price is a vehicle's price without options, whereas the MSRP is the car's price as it sits in the showroom -- with options, destination charge and any dealership add-ons.

For example, a car with a $22,000 base price might have an MSRP of $25,000 because the car includes $3,000 in options, which raises the MSRP for the vehicle far above the base price. Additionally, base price is often measured before any destination charge, which is included in the price of any car you'll buy from a dealer's lot. Destination charge can range from $650 to well over $1,000 in some cases, and that certainly makes for a higher MSRP.

Base price can also refer to the lowest-priced version of that car. If you're reading an expert review on AutoTrader or anywhere else, the author of that review may say something like "The 2015 Toyota Corolla starts at about $17,000." That price would be for the lowest trim level, the Corolla L. Most people don't buy the least expensive version of a car; they buy somewhere in the middle, say a Corolla LE. If a new Toyota Corolla L stars at $17,000, you should figure that it's really a $21,000 car with the features most people will want.

Invoice Price: What Does It Mean?

If the base price is the vehicle's price without options, then what's the invoice price? Essentially, the invoice price is the amount of money that the dealership pays the manufacturer for a car. For example, a car with a $25,000 MSRP might have an invoice price of around $23,000, meaning that the dealer likely owns the car for $23,000. That means the dealer has a profit margin of around $2,000.

Given that the invoice price is the dealership's cost on the car, you can't always find a dealer that's willing to sell the car for less than that. It is possible, though, because there are other ways that a dealership makes money from the sale of a given car. They might get an incentive from the automaker once they sell more than a set number of vehicles. There's also something called holdback, which is an amount of money that the manufacturer pays the dealer after the sale of the car. There's also profit to be found in the financing aspects of selling cars. So even when a dealership doesn't make any money from selling the car, it still makes a profit thanks to additional bonuses from the automaker. Still, buying a car at or below the invoice price is an excellent feat; most deals fall somewhere in between the invoice price and the MSRP.