What is Manufacturer's Suggested Retail Price?

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Definition:

The Manufacturer Suggested Retail Prices (MSRP) is the price at which a product manufacturer suggests that a retailer sell a product, though the retailer doesn’t have to abide by the suggestion.

🤔 Understanding Manufacturer's Suggested Retail Price (MSRP)

The Manufacturer Suggested Retail Prices (MRSP) is most commonly used in car sales. When car manufacturers send cars to the dealerships, they include an MSRP, which is the price they think the dealer should put on the vehicle. The MSRP (aka sticker price) is just a suggestion. Dealerships can price cars higher than the MSRP, and consumers can try to negotiate a price lower than the MSRP. Federal law requires that dealerships display the MSRP on a vehicle for sale. The MSRP is the price of the base model for the car, meaning it is the price without any optional features and add-ons, which could drastically increase the price of a car. Retail products other than cars also have MSRPs, though the retailer usually doesn’t have to display them.

Example

Suppose you’re in the market for a new car and head to your local dealership. You find a vehicle you like, and it has a sticker price (aka MSRP) of $20,000. However, the dealership has priced the car at $22,000. Because the manufacturer suggested the dealership sell the car for a lower price, you may feel like paying $22,000 for the vehicle would be overpaying. You can use the MSRP to try to negotiate the cost of the car down to $20,000.

Takeaway

An MSRP is like your parents suggesting you be home at a particular time without actually giving you a curfew…

When your parents give you a curfew, you know there’s no wiggle room. You had better be home by that time. But sometimes they might just suggest you be home by a specific time. You know you probably shouldn’t come home much later, but there’s a little wiggle room. That’s kind of how an MSRP works. The manufacturer suggests to the car dealership how they should price the car. They don’t have to stick to the MSRP, but they probably shouldn’t go much higher.

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What is the purpose of the MSRP?

The purpose of the MSRP is for manufacturers to indicate to retailers at what price they should be selling specific products. Manufacturers set these prices in the hopes that prices will remain consistent across different retailers. The MSRP is often the reason why a consumer good might be the same price at a dozen different stores.

Manufacturers provide MSRPs for lots of different products, but we often associate the term with the sale of automobiles. The reason for this is that federal law requires car dealerships to display the MSRP of the vehicle on the window.

In 1958, Congress passed the Automobile Information Disclosure Act (aka the Monroney Law, named after the Congressman who authored the law). The law requires that each new car have what is called a Monroney sticker (the sticker listing the MSRP). Dealers can’t remove the stickers — Only the car buyer can. Dealerships that break this law could be subject to significant fines or even prison time.

Depending on where you’re looking, the MSRP may also be referred to as the list price, the sticker price, or the base price. All of these terms refer to the amount the manufacturer recommends retailers sell a product at.

Is the MSRP the price the customer pays?

The MSRP is not necessarily the same as the price that the customer pays for a product (aka the retail price). In some cases, the customer might pay more than MSRP. While manufacturers might recommend a particular price to retailers, no requirement says retailers have to follow that price.

First of all, retailers might set their prices higher than the MSRP. In the case of consumer goods, you may never know that the retailer has their prices set higher. But since car dealerships have to display the MSRP on vehicles, you’ll know if they have the car priced higher.

If you’re buying a car where the retail price is higher than the MSRP, you might be able to use this when negotiating with the dealer for a lower price.

The dealer might not be willing to offer you the MSRP (or lower) on a vehicle, even if you negotiate. One situation in which they might not budge is if you’re shopping for a car that is in high demand, and there is a limited supply. If they know other people will pay the retail price, they might not be willing to give it to you for less.

It’s also important to remember that every business has unique overhead costs. Just because one dealer is willing to sell you a car for less than the MSRP doesn’t mean another dealership can or will.

Retailers and dealerships can also price their goods lower than what the MSRP indicates. While other types of retailers don’t have to include the MSRP of products for sale, they might choose to in this case. If the MSRP of a product is $50 and the retailer sells it for $45, you probably will feel like you’re getting a good deal.

What is not included in the MSRP?

The MSRP tells you the list price that manufacturers think retailers should sell a product for, but it doesn’t tell you everything. Some factors don’t go into the MSRP.

Dealer fees: Your car dealer might have any number of miscellaneous fees they charge to customers. These fees might include a fee for preparing sales documents, a dealer prep fee, or an advertising fee. The dealer tacks on these fees later, so they aren’t part of the MSRP.

Registration fees: After you buy a new car, you’ll have to visit your state’s Department of Transportation to register it. When you do so, you’ll have to pay a registration fee (usually, you pay this annually). The vehicle’s registration fee is not included in the MSRP.

Taxes: Sales taxes apply to vehicles just like they apply to other consumer goods, but they aren’t a part of the MSRP. But unlike other consumer goods, you don’t generally pay this tax when you’re buying the car. Instead, you’ll pay the tax when you visit your state’s DMV to register your vehicle.

Upgrade costs: The MSRP indicates the suggested price of the base model of the car. Your dealer will probably offer you plenty of upgrades when you purchase a vehicle. None of those upgrade costs are a part of the MSRP.

Destination charge: Some dealerships charge consumers a fee for the cost of shipping a vehicle from the factory to the dealership. This practice is one way that dealerships reduce their overhead costs — They pass them along to customers.

How does MSRP work for used cars?

MSRPs do not apply to used cars, only new vehicles. But there are other ways that consumers can figure out a fair price to pay for used cars. Services like Kelley Blue Book help to identify the “blue book price” of a vehicle, meaning the trade-in or sale value of used vehicles.

Consumers can use this information either when purchasing a used car from a dealer or when trying to trade in a used car to a dealer.

To figure out the blue book value of a vehicle, companies like Kelley will consider factors such as the age and condition of the car to account for depreciation. They’ll also take into account information such as the car’s size, style, and features.

What is the difference between the MSRP and the invoice price?

The invoice price is the price that the dealer pays when they buy the vehicle from the manufacturer. The invoice price is not going to be the same as the MSRP. Manufacturers know that dealerships need to make a profit on the vehicles they sell, so they set the MSRP in a way that leaves some wiggle room.

Dealers might be able to increase their profit margins even more by paying less than the invoice price. Just like consumers can negotiate on car prices, dealers can too. They might be able to get a discount on vehicles through dealer rebates or by achieving sales bonuses that manufacturers offer.

How do manufacturers calculate MSRP?

There are several different factors that manufacturers take into account when determining a car’s MSRP. First, they’ll consider the expenses they incurred manufacturing the vehicle. By adding up their manufacturing costs and overhead costs, they can figure out how much they spent in total to build a car.

Then, the manufacturer has to think about what kind of profit margin they want to see. Figuring out their profit margin helps them to figure out what they’re going to charge dealerships for the invoice price.

Once the manufacturer determines what the invoice price is going to be, they can decide on the MSRP. They want to make sure they set the MSRP low enough that consumers will purchase the product. They might look at the prices of competitor cars to help them narrow this down.

The manufacturer also has to leave room between the invoice price and the MSRP for the dealership to make a profit. After all, why would a dealer sell the manufacturer’s car if they aren’t making enough profit to make the sale worth it?

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