Car dealerships can use a lot of terms that you may not be familiar with. Many of those are related to vehicle pricing, such as MSRP, invoice price, dealer cost, and more. Here, we define what each means so you can go into the car-buying experience fully informed.
Understanding MSRP vs. Invoice Price
- What Is MSRP?
- What Is Invoice Price?
- What Factors Influence a Car’s Price?
- How to Pay Invoice Price (or Less) Instead of the MSRP
- Is Invoice Price Ever Higher Than the MSRP?
What Is MSRP?
MSRP is the abbreviation for manufacturer’s suggested retail price. In auto sales, it’s the price that the automaker recommends dealers sell a vehicle for — and what the automaker advertises on its consumer site. Unfortunately, there’s a lot of confusion about what it includes.
You’ll see it on a vehicle’s window sticker (aka the Monroney label), usually in bold print before any options. That amount plus the mandatory destination charge listed at the bottom of the column make up the vehicle’s “base price.” However, many people use the terms interchangeably.
Many people also use the term “MSRP” to refer to the total suggested price of the vehicle, including all of its options, the mandatory destination charge, and any rebates or fees that appear on the Monroney. There are better (more obvious) terms for this, including “sticker price,” “list price,” “total vehicle price,” and even “total MSRP.”
But regardless of what the MSRP includes, it’s important to understand that it’s just a suggestion. The dealer doesn’t have to sell a new car at the MSRP. They can add a markup or sell it for less than the list price.
It’s also worth noting that the MSRP is not the final price you’ll end up paying, as it doesn’t include things like dealer-installed options, sales tax, registration fees, or interest. The all-in outlay for a vehicle has yet another name: the out-the-door price.
What Is Invoice Price?
The vehicle invoice price is what’s listed on the invoice that arrives with the car — that is, what a car dealership pays the manufacturer for the vehicle. Dealer cost is the invoice price minus any hidden discounts from the manufacturer, such as incentives and dealer holdback. (The latter is something the automaker charges the dealership when it buys the car; it then refunds that amount when the dealership sells the vehicle.)
Such items reduce the dealer’s net cost while increasing their profit margin, allowing them to sell a vehicle below MSRP — and sometimes even below the dealer invoice price — while still making money.
One other thing to note: Occasionally, dealerships will use the term “wholesale price” in place of “invoice price,” although many speak about wholesale pricing only when discussing used cars purchased at auction. It’s the amount that car dealers base trade-in offers and used-car prices on.
What Factors Influence a Car’s Price?
Several factors can impact the final price of a vehicle:
Market value and demand High-demand models, including special editions and limited-production vehicles, often sell at or above the total MSRP, as dealerships have little incentive to discount them. Similarly, if a vehicle is slow to sell, that lack of demand may make a dealership more amenable to negotiation.
Trim level and add-onsHigher trims and extra features increase the sticker price.
IncentivesAt different times of the year, carmakers from Ford to Honda to Toyota offer discounts to clear out old stock and boost sales numbers. Shoppers can also take advantage of federal (and sometimes state) incentives on electric vehicles too.
Trade-in and financing offersA trade-in can lower the final price you pay for a new or used vehicle as well as reduce sales tax. And special financing may result in lower monthly payments.
How to Pay Invoice Price (or Less) Instead of the MSRP
The number one way to avoid paying too much for a vehicle is to do your research before going out to look at a car. Here are some strategies to help with the price negotiation:
Use pricing tools before heading to the dealershipWebsites like Edmunds and Kelley Blue Book (KBB) list car invoice prices, manufacturer-to-dealer incentives, and market-value estimates. You can try to calculate the dealer price from that, then use this number as a starting point for negotiation.
Ask the dealership if you can see the vehicle’s invoice costSome will be willing to show it to you and negotiate based on that, given it usually includes a reasonable profit margin.
Shop at the right timeDealers and their salespeople need to meet their monthly, quarterly, and/or yearly sales goals and may be willing to accept a lower price at the end of the month or year to do it.
Compare multiple dealershipsGet quotes from several locations to find the best price.
Is Invoice Price Ever Higher Than the MSRP?
The invoice price will always be lower than MSRP, as automakers and dealers bake in some profit with the MSRP.
It’s also common to pay over the invoice price, as some dealerships offer no-haggle pricing (which means they won’t negotiate). Others may add a dealer markup if the vehicle in question is in high demand or part of a limited-production run.
