Sticker Price Fiction
When you go to buy a wheelbarrow or a table lamp or a half-gallon of milk, you probably don't think twice about the Manufacturer's Suggested Retail Price, if, indeed, there is such a thing for those consumer products. The only price that has any meaning is the price you pay to purchase most items. Every car buyer, though, keeps a weather-eye on the MSRP. For the savvy buyer, it's the place from which negotiations begin, and for the surprising number of less educated buyers, it's the price they pay, no questions asked, without even considering the fact they could pay less.
So what's up with the MSRP anyway? What good does it do anybody? Well, originally it was created as a "consumer service." The MSRP is required by federal law to be prominently displayed on every new vehicle for sale in the United States, and usually it is plastered on what is referred to in the industry as the Monroney label or simply "the Monroney," named after U.S. Senator Mike Monroney, an Oklahoma Democrat who sponsored the 1958 bill that established the practice. Though it began as consumer protection, the result of the MSRP is consumer confusion. Why? Because the Manufacturers Suggested Retail Price is not a price in the sense most of us understand the term -- namely, the amount of money we actually pay to buy something. Instead, it is a fiction that has come to be used as yet another way to separate money from the consumer.
Just how big a fiction it is was demonstrated recently in some research undertaken on an on-going basis by Edmunds. One of the many things Edmunds does is track both Manufacturers Suggested Retail Prices and what they refer to as "net prices" -- the actual transaction prices for which vehicles are bought. And what they have discovered is that there is a wide gulf between MSRPs and net prices. For example, in December 2003, the sales-weighted average net price was $26,077, some 14 percent below average MSRP.
So does that mean you as a car buyer should look at the MSRP, offer your friendly dealer 14 percent less, and go smiling off into the future in a new vehicle? Would that it were that easy! It's not. These days with cash incentives and cheap financing deals fueling (and confusing the market), there's no telling what kind of discount from MSRP you should be looking for. For one thing, the MSRP-net price discrepancy has varied between 14 and 17 percent in just the last year. And part of the issue is a variation on the old shell game.
"Some automakers have begun to institutionalize incentives into their overall pricing strategy; in other words, they raise incentives and prices in tandem," said Dr. Jane Liu, executive director of data analysis for Edmunds. "It's working relatively well for the automakers, especially as improved products and a brighter economic situation is narrowing the difference between asking prices and net prices."
But while it might be working well for the automakers, it is throwing yet another hard slider at car buyers who have to withstand enough obfuscation in the process of obtaining a new vehicle.
To make matters even worse, there is a further discrepancy between domestics, Japanese, European and Korean nameplate vehicles in terms of their net pricing versus the fictitious MSRP. For example, in December 2003, the average domestic net price was 18.8 percent below MSRP, but for Japanese nameplate vehicles the difference between MSRP and the real transaction price was only 7.5 percent. Among the Europeans, the difference was slimmer still with the gap 4.8 percent in December 2003. Meanwhile, incentives and discounting assured that for Korean-built vehicles the difference between MSRP and net price was 15.2 percent.
So Mrs. and Mr. CarBuyer, do you look at the MSRP as consumer protection? Or is it just another in the auto manufacturers' kit bag to make the vehicle acquisition process more stressful than it needs to be?
Driving Today Managing Editor Jack R. Nerad is the author of The Complete Idiot's Guide to Buying or Leasing a Car.