What is the difference between MSRP, dealer cost, and dealer invoice?

Purchasing a new vehicle is an exciting experience, but it can also be overwhelming when it comes to negotiating price. Several key pricing terms define the numbers that both dealers and buyers need to understand in order to strike a fair deal. Learning the differences between key terms like MSRP, invoice price, dealer cost, and more will prepare buyers to negotiate from a position of knowledge and confidence.

Why Understanding New Car Pricing Terms Matters for Buyers

New car purchases involve thousands of dollars, so it pays for buyers to understand the pricing terminology. The manufacturer, dealer, and customer each have different financial considerations that shape the various pricing figures.

Without grasping these key terms, it’s impossible for buyers to determine a fair price. Knowledge reduces the information asymmetry between dealer and customer that favors the dealer in negotiations.

Understanding the incentives, hidden profits, and wiggle room in the numbers allows savvy buyers to negotiate the optimal deal. There’s real money to be saved by mastering how dealers set prices versus the actual costs involved.

Defining MSRP, Dealer Invoice, and Dealer Cost

Several key numbers provide reference points during price negotiations on a new car purchase. The most important terms to understand are MSRP, dealer invoice price, and dealer cost.

MSRP: Manufacturer’s Suggested Retail Price

• The MSRP, or sticker price, is set by the auto manufacturer for each vehicle model. This is the full “retail” price.
• MSRP is listed on the Monroney window sticker that must be displayed on all new cars by law.
• It represents the highest possible price for that specific vehicle, including factory installed options.

Dealer Invoice Price

• The dealer invoice is the bill sent from the manufacturer to the dealer for each car.
• It’s typically a few percent higher than what the dealer actually paid (dealer cost).
• The invoice price allows dealers a small profit over their wholesale cost.

Dealer Cost

• Dealer cost, or dealer net cost, is the wholesale price the dealer actually paid the manufacturer for the car.
• This number is not disclosed to customers, but is critical in determining fair negotiation parameters.
• Dealer cost represents the price floor that still allows a reasonable dealer profit.

How Dealers Make a Profit on New Car Sales

Understanding where dealers make their profit is key to negotiating a mutually agreeable price. There are several elements that allow dealers to earn money on new car sales beyond just the spread between MSRP and invoice price.

Invoice Price Allows a Small Dealer Profit

The dealer invoice price is typically 3–5% above the confidential dealer cost. This spread between wholesale and invoice pricing represents a small profit for the dealership. The exact dealer cost is not shared with consumers.

Additional Revenue Streams Help Dealerships

• Holdbacks: The manufacturer returns a small % (2–3%) of the car’s MSRP back to the dealer as a bonus after the sale.
• Factory incentives: Money paid to dealership for selling certain models or meeting sales quotas.
• Finance reserve: Dealers arrange car loan financing and can earn a cut of the interest rate above the minimum rate.

Negotiation Room Depends on MSRP vs. Invoice Spread

A wider spread between the inflated MSRP sticker price and the invoice price allows more room for dealers to discount the car during negotiations while still making a profit. This spread has narrowed in recent years.

Getting the Best Deal as a Smart New Car Buyer

Armed with accurate pricing information, buyers can negotiate the optimal deal by aiming for an end price at or below the dealer invoice. This achieves both parties’ goals.

Aim to Pay At or Below Invoice Price

Paying at or less than the invoice price means the dealership earns a profit while the customer gets a fair market price below sticker MSRP. This achieves the win-win of saving money while allowing the dealer to earn a reasonable profit.

Invoice Price Represents a Fair Deal Point

Dealers won’t sell for less than invoice or they lose money. Invoice or just below it achieves maximum savings since it’s close to the true dealer cost. Paying dealer cost means no dealer profit.

Use Online Resources to Access Accurate Pricing Info

Third party services like Edmunds, TrueCar, KBB and Consumer Reports provide pricing data to determine fair invoice prices and dealer costs for negotiating leverage. This levels the information playing field.

Negotiate From a Knowledgeable Position

Research MSRP, invoice, incentives, and competitive market pricing ahead of time. Know the fair price threshold and your alternatives to strengthened your negotiating position.

Other Important Pricing Factors to Consider Beyond Invoice

Getting the best deal requires looking beyond just factory pricing to understand the complete picture. Make sure you factor in the following:

TMV and Market-Based Pricing Dynamics

Vehicle demand, inventory levels, and competitive market pricing also impact negotiation range. TMV (True Market Value) captures market forces in your geographic area.

Factory-to-Dealer Incentives and Rebates

Additional manufacturer incentives, rebates, and promotional offers provide savings opportunities by lowering the net price. These incentives fluctuate monthly.

Dealer Add-Ons and Hidden Profits

Items like extended warranties, rustproofing, fabric protection are rarely worth the price but earn dealers profit. Minimize these extras or negotiate the price down.

By mastering new car pricing terminology and the factors that impact negotiated price, buyers can reduce information asymmetry and leverage transparency to strike the optimal deal. Knowledge of invoice price, dealer cost, market forces, and hidden dealer profits makes it possible to maximize savings while still allowing the dealership a fair profit on the sale.

FAQs

What’s the difference between MSRP and dealer invoice price?

MSRP is the manufacturer’s suggested retail price, or sticker price. The dealer invoice is what the dealer paid the automaker for the vehicle.

How much below MSRP should I pay for a new car?

A good target is to negotiate a selling price around or below the dealer invoice price. This typically represents a fair deal.

Where can I find the dealer invoice price?

Third-party pricing sites like Edmunds and TrueCar provide accurate dealer invoice prices and market pricing data.

What other ways do dealers make profit on new cars?

Beyond the spread between MSRP and invoice, dealers also get factory-to-dealer incentives, holdbacks, and add-on products.

Should I pay the asking price from the dealer?

Rarely. There is usually room to negotiate down from the asking price. Know the market value and invoice price as leverage.

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