If you’re interested in buying a car, you’re probably already familiar with the process: A dealership buys a car from a manufacturer or gets a trade-in, then marks it up to include profit and sells it to a customer. This becomes their new car’s MSRP.
But just how much markup is in each car? What financial basics can you learn about it?
Let’s go over the new car MSRP vs dealer cost of a vehicle. We have some useful information that will inform you of your next big purchase.
What is an MSRP?
This term stands for Manufacturer’s Suggested Retail Price. It’s basically what the automaker recommends the car should cost. When you buy a new car, it’s important to understand that you’ll almost always be paying an amount higher than the invoice price to make the purchase.
Since automakers rarely sell their vehicles to consumers, they sell them to their franchised dealers instead, who in turn retail them to you. The dealer is bound by federal and provincial retail laws and is expected to follow the automaker’s standards for the dealership. In almost all cases, you’re buying your new vehicle from an independent retailer.
As the name implies, the MSRP is a suggested retail price, and dealers aren’t required to stick to it. If they deviate, it’s usually in your favour – you’ve probably seen ads like “Dealers may sell for less.” However, if it’s a very desirable model and there aren’t many available, don’t be surprised if the dealer asks for more than the suggested price.
The MSRP is merely the starting point in negotiations at the dealership. In fact, many people disregard MSRP altogether while negotiating.
It should be noted that MSRP does not reflect the “out the door” amount that you should expect to pay. It doesn’t include registration, taxes, destination charges or other fees. Although MSRPs are ostensibly used to protect consumers, they are just the tip of the iceberg when it comes to getting a great price on a vehicle.
What is a Dealer Invoice Price?
The invoice price of a new vehicle is the price on an invoice the manufacturer sends a dealer when they acquire a vehicle. Many people believe that this is the true dealer cost of the vehicle, but it is not. Invoice prices also have hidden profit built into them such as dealer holdback and manufacturer to dealer incentives.
Automakers usually factor in a discount for their dealers, primarily to cover commissions, salaries, and business overhead, known as the holdback. It’s usually between about 1 to 3 percent of the car’s MSRP and is subtracted from the invoice price.
There can also be factory-to-dealer rebates, known as the dealer allowance, which can be used as incentives for dealers to sell more cars, or to help bring the price down for slower-selling models. While it will depend on the automaker and the vehicle, the dealer cost can be hundreds or even thousands less than the invoice price.
Here’s Where You Can Learn More
Keep yourself informed about the latest information about Canadian cars. To start enjoying your car buying experience, check out our website to see the breakdown of prices from our many detailed reports.