MSRP vs. Invoice: Their Differences and Why They Matter

MSRP vs. Invoice: Their Differences and Why They Matter

Survey a random group of people about their least favorite part of buying a new or used car from a dealership, and chances are the majority will mention negotiating the vehicle's final sale price.

The description “least favorite” may apply to many car buyers, but for some, haggling with a car salesperson is downright terrifying.

The sales teams at car dealerships everywhere know this, too, and needless to say, they use it to their advantage.

That's why it's essential for buyers to educate themselves as best as possible before even stepping foot onto a dealership lot.

In this article we talk about the many terms that car dealers know and use well – manufacturer's suggested retail price, invoice price, true market value and dealer cost – and we explain the differences between each, too. We also offer some tips that you can use to better prepare yourself in the case that you happen to find yourself having to hammer out a deal with a sales person.

And, in all honesty, smart car buyers are on to the fact that price haggling is all but a thing of the past. Such is the case with Shift, which uses powerful machine learning algorithms and loads of data to provide fair, no-haggle prices from the get-go. So there's no need to negotiate the final price of your new used car whatsoever.

Haggling used to be an expected part of the car-buying process. It is still the case in most dealerships. That's why understanding the differences between industry-specific terms like invoice price, MSRP, dealer cost and other terms is of utmost importance. 

But Shift makes buying a used car as honest and fair of an experience as possible by utilizing powerful machine-learning algorithms and tons of data. They might not be as cheap as Craigslist, but their inventory is also much cleaner, simpler, reliable and reputable than most anything you’ll find for sale from a private seller or corporate dealer.

If you're thinking about buying a car from a dealership, whether new or used, the terminology we're about to go over is crucial to know. Regardless, keep in mind that we're well into the 21st century, and not all car sellers – such as is the case with Shift – operate the same way they did just a decade or two ago.

In short, the following is a rundown of jargon that’s important to have in the forefront of your mind. But it’s not necessary if you’re shopping for a new used car with Shift.

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What is MSRP?

“MSRP” stands for "manufacturer's suggested retail price." And before we tell you what it is, know this:

It is not – we repeat, not – the price the dealer paid for the vehicle. Rather, it's significantly more.

Essentially, this is the monetary amount that automakers recommend to car dealers as the preferred cost of the vehicle to offer a buyer.

The MSRP is also known as the vehicle's "sticker price," as it refers to the figure that's listed on the actual price tag or by way of those flashy neon number stickers that you've most likely seen plastered across the windshields of cars for sale at any given lot.

It's important to know, however, that the MSRP does not include any of the vehicle's optional features or upgrades. If a particular vehicle happens to be an upper-trim edition or come with additional add-ons like a panoramic sunroof or enlarged alloy wheels, the cost of those items is separate altogether from the MSRP.

Also, while dealerships usually stick to the price that automakers suggest, this is not always the case. In fact, the dealership has every right to sell the vehicle for a price that's actually higher than the MSRP.

Unfortunately, many buyers assume that the MSRP is the true and fair price of the car, which is anything but the case. Automakers do not have the final say in the going price for any vehicle at the dealership. Rather, the most they can do is offer an MSRP. If anything, the MSRP should be considered as the starting point for negotiations between the buyer and the dealership.

So if you've got your eye on a specific make and model of vehicle, it's all the more important for you to closely analyze the price that the dealer is offering with the actual MSRP as well as the vehicle's invoice price and its true market value, too.

What is invoice price?

The term “invoice price” specifically refers to the amount that the dealer actually pays the automaker for any particular vehicle. It's also sometimes referred to as the “dealer price.”

In theory, the difference between a vehicle's MSRP and its invoice price is the base for the dealership's total profit, not taking into consideration additional dealership fees.

Most of the time, destination or freight charges – that's to say, the cost of the automaker physically transporting the vehicle to the dealership lot – are included in this figure.

The invoice price is actually frequently significantly greater than the final price paid by the dealer for any given vehicle. This is because dealerships often receive significant discounts from automakers in the form of rebates, bonuses, perks, incentives or "holdbacks," which are effectively refunds received from the carmaker after a transaction is completed.

Depending on the car company, dealer holdbacks might range between 2 and 3 percent of the invoice price or the manufacturer's suggested retail price. That can add up to more than $1,000, depending on the cost of the car.

Given that keeping a car on the dealership floor comes with a fixed cost for the dealer, a carmaker may offer the dealership other discounts to help sell a particular make and model, too.

So, needless to say, knowing both the MSRP and the invoice price of any vehicle is essential for you to receive the best price possible when it comes time to negotiate with the sales staff.

What is true market value?

The term “true market value” is used to refer to what buyers are on average actually paying for any given make and model of vehicle. It's also sometimes known as “fair market value.”

This figure usually falls somewhere in between the MSRP and the invoice price and is essentially determined by the rules of simple economics. Supply and demand as well as options and incentives all come into play when establishing a vehicle's true market value.

Keep in mind, if a specific make and model of a car is in high demand, its true market value may actually be higher than the MSRP. This can vary from region to region, too. For example, if you live in an area that's known for snowy weather and icy roads, vehicles equipped with all-wheel-drive like the Subaru Crosstrek or the Honda CR-V may have a higher true market value than they would in a place like sunny Southern California, for example. Similarly, hybrid vehicles like the Toyota Prius or Nissan Leaf may have a higher true market value in a region known for having steeper gasoline prices like Hawaii or Southern California as opposed to Mississippi or Missouri.

Most dealers will not openly share this amount with potential buyers, as their goal is to maximize their own profits by charging – or better put, overcharging – buyers as much as possible. Don't forget that.

Websites like Edmunds and Kelley Blue Book offer recommendations for most any vehicle's true market value, so it's worth taking a look at one or the other – or both – before you begin to negotiate with the salesperson.

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Some tips and other things to keep in mind

When the time to talk pricing with the dealer comes, knowing what the dealership actually paid for the vehicle — not just the invoice price — will give you a significant advantage as far as coming to a fair price goes.

Always remember, the new car invoice price is higher than the dealership cost. That's to say, the dealer most certainly paid less for the vehicle than whatever the invoice price happens to be.

Rather than trying to work your way down from the MSRP, experts actually recommend using the dealer cost as a starting point for negotiations. Doing so not only puts you at the lower end of the price range from the get-go, it proves to the salesperson that this isn't your first time at the car-buying rodeo.

Never forget, do your homework. In addition to the MSRP, which you'll no doubt see listed on the car, be sure to know its invoice price, true market value and dealer cost, too.

Remember that traditional dealers frequently try to perplex buyers by way of fast talking through specifics like invoice costs, MSRP, and fair market value. Shift, on the other hand, avoids this entirely by providing fair, no-hassle prices that are driven by strong machine learning algorithms and massive amounts of data from the start. This way, they're able to provide consumers with the best possible price without having them nickel and dime their way to a decent deal.

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Author
Shift Editorial Team