What Is MSRP? Why It’s Important to Know Before Buying a Car

But the auto industry has an unfortunate reputation for advertising a price for a new vehicle and then adding fees that can inflate the purchase price by thousands of dollars.

In recent years, some provincial governments have introduced regulations requiring car manufacturers and their dealers to advertise “all-in” pricing that gives consumers a better idea of a vehicle’s true purchase price.

Still, some unscrupulous car dealers may try to charge you extra by installing accessories you didn’t ask for, or by inflating legitimate fees for registering and licensing the vehicle in your name.

With some basic knowledge about how vehicle pricing works, you’ll be able to negotiate your next car or truck purchase with confidence and know you’re getting what you paid for without paying too much. If selling or trading in your current vehicle, here's how to know what your vehicle is worth.

What does MSRP mean & how does it differ from base price?

MSRP is an abbreviation for “manufacturer’s suggested retail price” – the price the automaker suggests its dealers ask for the vehicle in question.

Because most automakers and brands sell vehicles through the traditional dealership model, the dealer acts as a third party: They buy vehicles from the manufacturer at one price, and then sell them on to consumers at the MSRP, which is higher. The idea is that the dealer makes a profit on each car it sells.

Car dealerships’ MSRP vs base price

A vehicle’s base price, or base MSRP, is what the manufacturer suggests dealers charge for the most basic version of any given model. If you want a nicer trim level, or options that contain desirable features, then the vehicle’s MSRP becomes its base price plus the cost of those extra features, which you’ll find on the manufacturer’s website. That MSRP is the one you’ll need to begin the process of purchasing your new car.

Can you negotiate the MSRP when buying a car? 

Not only can you try to negotiate a purchase price lower than a vehicle’s MSRP, but you should. Because car dealers buy vehicles from the manufacturer at a cost lower than the MSRP, there’s room for negotiation at the retail level, but how much room depends on a few other factors.

There is more transparency in today’s new-car transaction than there used to be, but there’s still information about a vehicle’s price that is hard to come by. The invoice price is theoretically what the dealership pays to buy a vehicle from the manufacturer. Dealers used to be secretive about invoice pricing, but it’s now relatively easy to find a vehicle’s invoice price online.

In reality, there’s an even lower dealer cost per vehicle on which the store bases their side of the negotiation. It often incorporates what the industry calls a holdback, which cuts a couple per cent off the invoice price to help the dealer cover the costs of doing business, like commissions, salaries, and other overhead costs.

A dealer’s invoice price is always negotiable

Sometimes, the manufacturer offers its dealers rebates to lower the price of less-popular models, and there are often incentives available to dealers that meet certain sales targets.

Alone or in combination, those manufacturer-to-dealer discounts can add up to a dealer cost per vehicle that is, in some cases, thousands of dollars less than the invoice price – never mind the MSRP.

So even if you know a car’s invoice price, the dealer may be willing to sell you a vehicle for less than that amount, which is why you should always negotiate.

Also, the profit margin is typically larger on more expensive vehicles, so you may not be able to score as significant a discount on a compact economy car as you would on a large SUV or a luxury SUV model. 

Can a dealer sell a car for more than the MSRP?

Yes, they can. Typically, this happens with particularly desirable vehicles produced in limited numbers, or with a new model that the manufacturer has promoted for months or even years prior to its market launch to punch up demand.

In recent months, it has become more common for vehicles to sell for over the MSRP thanks to pandemic-related supply chain disruptions. Shortages of silicon semiconductor chips and other components have made it difficult for many manufacturers to build as many vehicles as they want to. 

The resulting supply shortage means there’s more demand for the cars and trucks that do make it to dealerships, and that extra demand can make it more difficult to negotiate a selling price at or below MSRP. In some cases, if you don’t buy a car at the price the dealer is asking, they know someone else probably will.

Dealers make money on other services & extended warranties

However, dealers have revenue streams other than the profit they make off the sale of a new vehicle. Dealerships also make money from the sale of extended warranties, anti-theft alarms, nitrogen-filled tires, prepaid maintenance packages, wheel locks and rustproofing, to name a few common items. 

These are legitimate add-ons, but only if you ask for them or agree to purchase them at the dealer’s suggestion.

Always check dealer invoice for hidden fees & unwanted car add-ons

After you and the dealer have agreed on a price for a vehicle equipped as you want it, look over the invoice carefully before you sign it to make sure the dealer hasn’t added any extras you didn’t ask for. And if you decide that you want any extras that the dealer suggests, check that you’re getting what you pay for: You should get paperwork with an extended warranty, for example, and verify that any physical add-ons are installed before you drive the car away.

Remember that you can also get a better deal on some of these items from aftermarket retailers and installers. When you purchase these extras through a dealer, you’ll often pay more for the convenience of having them do the work before you take delivery of the car.

If you need to finance the cost of your vehicle, there’s nothing wrong with arranging financing through the dealer, but know that they usually make money through that, too. If you’re not sure whether to pay cash or finance, read our helpful resource: Buying a Car: Should You Pay Cash or Finance?

What other fees can you expect to pay when buying a car from a dealer?

Freight/destination and PDI (pre-delivery inspection) charges

The most common dealer fees that have traditionally not been included in the MSRP are freight/destination and PDI (pre-delivery inspection) charges. The freight charge covers the cost of transporting a vehicle to the dealer from where it’s built. It is set by the manufacturer so that every consumer pays the same amount, no matter how far their dealership is from the factory.

When you sit down with the salesperson to discuss the price you’ll pay for your new car or truck, you may see line items on the invoice for PDI and/or “admin.” PDI stands for pre-delivery inspection, the standard terminology for preparing the car for delivery to you, and can involve washing the vehicle or removing protective plastic from the seats and wheels. 

You should ask the salesperson what is covered by the PDI fee. If you feel like they’re overcharging, ask the dealer if they’ll give you a discount or remove the charge from the invoice altogether.

Dealer administration or documentation fees

The dealer will probably also add an administration or documentation fee for registering the ownership in your name and putting licence plates on the car. These are legitimate charges, but make sure the dealer isn’t overcharging you. Just make sure they’re up front with you about these fees and that they don’t try to quietly add them after you’ve negotiated what you thought was the final price.

Check the car manufacturer’s website for provincial MSRP and included charges

Some – but not all – Canadian provinces and territories require automakers to include the freight/destination charge when they advertise an MSRP. You can see which fees are included by visiting the manufacturer’s website and selecting your province/territory of residence. Some manufacturers also limit how much its dealers can charge for administration and/or documentation fees.

How does Canada Drives simplify the car buying process?

Canada Drives is on your side and aims to make the process of buying your next vehicle as painless as possible. 

Get pre-approved in minutes 

Shop with confidence knowing exactly what your budget is with a pre-approval.

Get pre-approved here – we'll connect you with a dealer partner in your area who will show you vehicles you qualify for, just pick the one you want and drive away. No stressful negotiations or fear of rejection in the finance office!

Sell your car directly to Canada Drives

If you have a vehicle you want to trade in or sell, you can get an instant offer online. 

Quickly enter your car info here – if you like your offer simply drop off your vehicle at a convenient Canada Drives location and get paid!