Consumers are overwhelmed with cute acronyms that often confuse the car buying process. One stroll through the dealership showroom and mechanic’s bay, and you can walk outside wondering if you have just left the screening of a science fiction movie. One of the most frequently cited and misunderstood abbreviations in the automotive industry is called MSRP. You have heard the term mentioned by car sales representatives and have seen the acronym displayed on new and pre-owned cars, at least that is what you think the sticker prices of a vehicle means.
The fact remains a large percentage of consumers have no idea what MSRP means. Ignorance is not bliss for consumers who mistakenly refer to MSRP as what they have to pay for a new or used car. Car sales reps love to make money off uneducated car buyers.
With that in mind, let’s explore what MSRP means and how it affects the price you pay for a new or pre-owned vehicle.
The Key Word is “Suggested”
MSRP is the condensed version of Manufacturer’s Suggested Retail Price. Three of words are easy to understand, but the word “Suggested” can trip up consumers who have no idea what the word means. The reason for the confusion is how the business model works for a wide variety of other industries. For example, the price suggested by Apple for the price of the latest iPhone is what retailers typically charge consumers. However, when automakers suggest a price for a new vehicle, dealerships carrying the make and model are under no contractual obligation to charge the suggested price. In fact, automakers encourage dealers to offer incentives that lower the manufacturer’s suggested retail price. MSRP goes by many names, including retail price and sticker price, but one word makes the biggest difference in what you pay for a new or used car.
When Economics Overrules MSRP
Car dealerships have many reasons for going above or below a vehicle’s MSRP, although auto manufacturers strongly discourage the practice of dealers charging more than the MSRP. The fundamental economic principle of supply and demand can prompt auto dealerships to lower or raise the sticker price of a vehicle. Mandated by law, a car’s MSRP fluctuates depending on the demand consumers have for a vehicle and the supply delivered by an automobile manufacturer. Hot makes and models fresh off assembly lines, such as the Mazda Miata, Honda Odyssey, and Chrysler PT Cruiser sold for significantly more than the auto manufacturer’s suggested retail price. Another economic factor that influences a change in MSRP is the freight charge of transporting a car from the manufacturer to the dealership.
MSRP and Fair Purchase Price
Consumers have a better price to refer to for buying a new or pre-owned car. Fair purchase price (FPP) is the most accurate pricing tool available and consumers can determine FPP by using one of several online resources. FPP represents the car price consumers currently pay on an open car market platform. Market conditions influence FPP, which can exceed a MSRP in cases like the MAZDA RX8. The popular Mazda model sold above MSRP because of limited supply. FPP is not influenced by auto dealerships or manufacturers. It is determined by transaction data generated over the open car market. Knowing the FPP of a new vehicle is a valuable negotiating tool for consumer to have at car dealerships.
Optional Equipment Changes MSRP
Customization has become a common term for consumers who want to mold products to fit their perfect visions. By adding optional equipment to new vehicles, consumers customize a standard make and model. The customization of vehicles makes MSRP irrelevant, as additional options increase the price of a car. Auto manufacturers set a MSRP for vehicles based on the standard options available for each trim. Consumers then select the additional features they want that increase the price of a new car.
Remember that when you sit down to negotiate the price of a new or pre-owned vehicle, the sales representative will probably mention the car’s MSRP to get the ball rolling. Savvy car buyers ignore the mention of MSRP and instead, come prepared for the negotiations armed with the latest FPP data, as well as the costs of adding features such as power windows and a rear view camera.