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Car-Buying Basics: What do MSRP, Dealer’s Asking Price, and Invoice Price Mean?

Shopping for a new car can be exciting. But for first-time car buyers, or those of us who only frequent car dealerships every ten years or so, it can also be a bit intimidating. The moment you set foot on the lot you are inundated with terms like, “dealer’s prices,” “invoice prices,” and  “MSRPs.” Who knows what it all means?

The basic terms that describe prices and values of automobiles are not difficult, but they are important. In fact, misunderstanding these terms can cost you money, since it can mean that you end up paying more than you should for your car.

Below we’ve broken down three key terms you’ll need to know when shopping for cars.

Three basic car-buying terms: MSRP, dealer’s asking price, and invoice price

The basic components of car pricing can be referred to in a variety of ways. Here’s what you need to know about each one:

1. What is MSRP?

MSRP stands for Manufacturer’s Suggested Retail Price. It’s displayed prominently on the car, and it looks like the official price tag. Simple, right? Be sure you understand two things about MSRP:

  • It’s a suggested price: The MSRP is the price suggested by the manufacturer to sell the car. Pay special attention to the word “suggested.” Both the MSRP and the dealer asking price are sometimes referred to as a “sticker price” because you see it on the window sticker of the car, according to Matt Jones, senior consumer editor at auto industry research site Edmunds.
  • It’s not necessarily what you should pay: It’s probably not the price you should or will pay. No more than 10 percent of new car buyers pay the MSRP price; the exception is when a car is in high demand. As an example, Jones harkened back to 2008, when gas was as high as $5 to $5.50 per gallon. “Hybrids were going for full sticker price,” he noted; nowadays, with significantly lower gas prices, “the car becomes less valuable, and nobody pays full sticker price.”

2. What is the “dealer asking price?”

The dealer asking price is a lot like the MSRP, except instead of being the price suggested by the manufacturer, it’s the price suggested by the dealer. Because it is sometimes seen on the window of the car, it may also be referred to as a sticker price. You may also have to ask the dealer for it.

The dealer asking price may be more or less than the MSRP; Jones compared it to a new phone coming out with a suggested price of $479, but is then sold at $359.

  • It’s like a price tag on a car: The dealer asking price is the price that the dealer wants to get for that car. It’s the closest thing to a price tag on a car. You could write a check for the dealer asking price, plus sales tax and any fees, and drive away with the car.
  • It’s not necessarily what you should pay: Unless you’re shopping at a “no haggle,” dealership, the dealer asking price may still not be what you can or should pay for the car you see on a lot. The average price paid by other buyers of that car may be significantly less.

3. What is the “invoice price?”

In general, the invoice price is the amount the dealer paid the manufacturer for the car. Dealers have to purchase cars from the manufacturer to stock their lots. In some cases, the invoice price can be misleading, however, because dealers may receive money back from manufacturers that is not shown on the invoice.

Dealers often tout the invoice price, and imply that they’re losing money or only making only spare change if you pay anything close to the invoice price. Some dealers even try to make you feel sorry for them. One dealer I visited in Kahului, Hawaii, pulled a can of dog food out from his desk and said with a straight face, “This is what I’ll be feeding my family this month.” That may have been good theatrics, but it’s not the full story.

What is true is that the dealers don’t have as much margin between what they pay the manufacturer for the car and the amount they sell it for as they did in the past. “For example a dealership buys a car for $20,000, and the MSRP might be $21,750. The dealer’s asking price might be $21,000,” said Jones.

  • It’s another data point you can use to negotiate a good deal on a car: The invoice price is what the dealer paid for the car, before holdbacks, incentives and other arrangements between the manufacturer and the dealer.
  • It doesn’t give you the complete picture: Because of holdbacks and other incentives, invoice price doesn’t always reflect what the dealership really paid. “Ten years ago, ‘invoice net’ was what a dealer paid for the car,” said Jones. Now, Jones acknowledged it can be a contentious subject. People rely on the invoice price number, but it’s not as clear cut, and dealerships could probably do a better job of explaining how invoice prices work.

Where do rebates and incentives fit in?

“A car can have a sticker price of $21,500 and an invoice price of $20,000, but there may also be rebates or incentives, both to the dealer and the customer,” says Jones. “Some manufacturers will give the rebates to the customer; others give it to the dealers to sell the cars.” Rebates and incentives further complicate the issue of what a car is really worth, and what you should pay for it.

An example of a customer rebate would be a military rebate. If you are a service member, you may qualify for an additional $500 off the price of the car. There are also year-end incentives given to dealerships, in hopes the dealership will use these to try to boost sales by passing those incentives on to customers.

Be sure to ask about rebates when you’re at the dealership; otherwise, you may miss out on a rebate that you qualify for. You can also look for rebates and incentives online; for example, consider the National Automobile Dealers Association-organized NADAguides.com, which provides consumers pricing information for cars and other vehicles.

What should I focus on — the MSRP, the dealer asking price, or the invoice price?

Knowing all three pricing numbers for a car still doesn’t guarantee you know exactly what you should pay for it. According to Edmunds, you should expect to pay something between the invoice price and the dealer asking price or MSRP. The three basic pricing numbers for a car are a starting point, not a destination. There’s one more number that is more important than any of these.

The number that matters the most to you when you are buying a car is the average amount most people are actually paying for it. If you are willing to shop around, you should be able to buy a car at this amount, or possibly even less. A dealer can ask any price, or can show you “invoices” that say they paid a certain amount for a car, but if you know the average selling price for that car is $3,000 less, you should keep shopping around. You’ll either get the dealer to sell to you at a competitive price, or you should take your business elsewhere.

One way to find out what other people are paying for a car is by looking at Edmunds’ True Market Value pricing. You can enter information including your geographical area, the make, model, options, and color, and TMV gives you a realistic number you can use when negotiating for a car.

Another online pricing site is Kelly Blue Book. Although Kelly Blue Book has long been known for their valuations of used cars, they also provide information about new vehicle markets.

What else do I need to know before I shop for a car?

While you’re getting a good deal on the price of a car, don’t forget other factors that can be much more significant for you over the long run.

The most important number you should know before you set foot on a car lot, is what you can afford to pay. Spending too much on a car can put a strain on your budget for years. LendingTree offers an online car payment calculator that may help you tell how much your payments would be with various sales prices, down payments and interest rates. Decide how much you want to spend on a car before you go shopping.

You’ll also want to research how satisfied other customers have been with the particular make and model you are interested in, and how much it generally costs to repair and maintain that car. You can find information about car owner satisfaction and costs of ownership on the Consumer Reports site.

No matter how much research you do, however, there is no substitute for test driving a car before you buy it. “Up to 20% of shoppers don’t test drive the car,” said Jones, citing Tesla buyers as an example. As Jones noted, these drivers can’t test drive the car because they’re not buying it off a lot. They have so much faith in research that they don’t think test driving is necessary.

However, Jones strongly advised against this — “under no circumstances should anyone ever buy a car without test driving,” said Jones, adding that it doesn’t even matter if you’re a “car person.” Make sure the seat is comfortable, you can see all the windows, and you don’t shake as you go down the road — it’s too big a purchase to make without getting behind the wheel.

If you get the best price possible on a car, but don’t shop around for the best deal you can on financing, you could still pay too much for your car. Before you take on-site financing at the dealership, this LendingTree tool could help you compare auto loans online to see if there might be a way to save more money. The amount you save could make a huge difference.

Knowledge is power when buying a car

Buying a car, and doing a good job of it, is a lot of work. You not only have to research the cars themselves, but you have to understand purchasing terms like MSRP, dealer asking price, and invoice price. If you take the time to educate yourself, you’ll be one step closer to getting the best deal on a car — the right car for you.

 

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