Why Are Car Dealerships Charging Over MSRP?

Why Are Car Dealerships Charging Over Msrp?

For any car buyer, paying over the manufacturer’s suggested retail price (MSRP) can feel frustrating, especially on a major purchase. However, several market dynamics help explain why many dealerships have adopted an above-MSRP pricing model in recent years.

By examining the supply and demand challenges, profit pressures, used car value shifts, and competitive strategies at play, this article provides valuable context around this industry trend.

Supply Constraints Empower Sellers in Tight Markets

At its core, charging over MSRP stems from basic economics: when demand outstrips supply, sellers gain negotiating leverage. With ongoing microchip shortages still limiting new vehicle production, tight market inventories have handed power to dealerships.

According to Cox Automotive data, average days supply dropped below optimal levels of 60-90 days for much of 2021. When so few vehicles are available in a local area, buyers become desperate to secure their desired model before others.

Dealers know customers will pay elevated prices rather than lose out, allowing significant markups with little resistance. While frustrating, this reaction aligns with fundamental supply/demand principles – constrained supply rationalizes premium asking prices from a business perspective.

Supply Constraints Empower Sellers In Tight Markets
Supply Constraints Empower Sellers in Tight Markets

Shrinking New Car Margins Drive Profit-Seeking Behavior

Another factor is sustained margin pressures across the auto industry. New vehicle gross profits fell sharply from a 13% average in 1990 to under 7% by 2010 as discounts from MSRP grew commonplace. With fixed overhead costs like facilities remaining steady,

dealers searched for revenue growth to maintain profitability. Charging above MSRP emerged as an effective strategy, offering lucrative single-digit percentage boosts per sale. These incremental margins mean the difference between losses and healthy returns,

critical for dealers still covering high wages and expenses amid reduced new car volumes in recent decades. Protecting the bottom line incentivizes above-MSRP pricing policies, regardless of customer satisfaction levels.

Shrinking New Car Margins Drive Profit-Seeking Behavior
Shrinking New Car Margins Drive Profit-Seeking Behavior

Soft Used Car Values Shift Revenue Streams

Rising interest rates have cooled the used car sector in 2022, cutting values thousands below prior highs. This diminishes the intrinsic worth of pre-owned inventory on dealer lots. To offset reduced profits and stabilize overall revenues,

franchises leverage above-MSRP fees as a counterbalance, recapturing missing profits from the used side. Viewed internally as margin protection against market swings, these charges fill gaps and preserve balance sheets during periods of economic uncertainty.

Prioritization and Allocation Leverage

Another advantage: above-MSRP sales strengthen order bargaining power with automakers. Promise reliable premium pricing, and you become a more valuable customer than one strictly following MSRP.

This enhances volume targets and priority fulfillment on future allocations, with guaranteed profits boosting both parties. Markups hand dealers significant influence over new vehicle flow year after year in tight-supply conditions.

Prioritization And Allocation Leverage
Prioritization and Allocation Leverage

Subjective Applications Signal Profit Motives

If supply constraints alone dictated pricing, comparable trim levels should see consistent percentage adjustments. However, subjective “market adjustments” vary arbitrarily between options. Well-optioned models may command thousands

added while base trims dodge fees – signaling dealer discretion over strict reaction to macro factors. Discrepancies reveal eagerness to maximize margins on a case-by-case basis above showing sheer industry response.

Subjective Applications Signal Profit Motives
Subjective Applications Signal Profit Motives

Online Visibility Drives Margin Competition

Finally, the online shopping era demands competitive advantages. With immediate price comparisons, every percentage counts to attract in-person visits versus digital-only competitors. Markups allow selectively undercutting neighbors by just

enough to appear the better local choice in filter results. Even if modestly over MSRP, promotional positioning drives traffic willing to compromise for purchase finalization rather than endless browsing. So digital promotions further incentivize above-list pricing strategies.

Dealer Inventory Management

Charging over MSRP allows dealerships to reduce inventory levels and manage cash flow more effectively. With fewer vehicles sitting on lots unsold, dealers have less money tied up in inventory. By moving cars off the lot quicker through higher sale prices,

dealers can avoid costs associated with extensive on-lot storage. They are also able to place orders for new inventory with manufacturers more confidently knowing vehicles won’t collect dust. This empower dealers to maintain optimal inventory

turns and inventory carrying costs. The higher margins from markups provide dealerships with greater financial flexibility to operate without bulking up vehicle stockpiles. By keeping a lower overall inventory volume, dealerships can focus on

Dealer Inventory Management
Dealer Inventory Management

Customer Perspectives

While supply constraints provide rationale for markups from a dealer perspective, it understandably frustrates customers hoping to pay MSRP or below. Paying over MSRP can feel like predatory pricing to some buyers. Consumers growing

accustomed to internet pricing transparency and negotiating leverage now feel blindsided facing thousands in arbitrary fees. The lack of choice in tight markets exacerbates this sentiment, as walking away is not realistic with months long waits for alternatives.

Additionally, discretionary markups between trim levels undermine the supply constraint argument for some. Customers spent years benefiting from incentive programs and discounts, so an abrupt switch to premiums added at dealer discretion jars expectations.

Customer Perspectives
Customer Perspectives

Regulatory Challenges

Government regulation of vehicle pricing is limited due to franchised dealer model and laws preventing manufacturers from dictating retail prices. However, some states have acted to ban certain arbitrary or excessive markups. For example,

Connecticut and California have passed laws prohibiting markups of more than 3-5% over invoice pricing without additional vehicle options to justify higher costs. Regulators in other regions are debating further rules around transparency over

additional fees and caps on discretionary add-ons. However, dealer lobby groups typically protest more restrictive pricing oversight as interference in private business practices. Defining what makes a markup “excessive” also poses challenges given varying supply and demand across local markets.

Regulatory Challenges
Regulatory Challenges

Alternative Sourcing Options

Outside of in-person dealership purchases, options like large independent brokers or online direct sales may provide opportunities for customers to avoid above-MSRP fees in many cases. Brokerages not affiliated with franchised dealers can

sometimes secure allocations from manufacturers without markup requirements. Companies working with numerous dealers nationwide also have more supply chain visibility and negotiating power to obtain vehicles at or near MSRP.

Additionally, several automakers like Tesla, Rivian, and Polestar now sell certain models online without any dealership middlemen taking a cut of profits. While inventory may still be limited on popular models, direct sales streamline the process, promote transparency on pricing,

and empower individual negotiations over mandatory dealer fees. As customer comfort with internet car shopping grows, alternatives to traditional franchised dealers could expand and provide consumer-friendly ways to circumvent above-list pricing issues seen on many new vehicles today.

Long-Term Industry Impacts

Persistently high new vehicle prices could shift more buyers to the used market long-term or accelerate adoption of alternatives like EVs. Automakers will need to weigh potential volume impacts of dealer pricing strategies. If above-MSRP fees

remain common even after supply stabilizes, some customers may choose to wait several years to buy used instead of paying thousands extra on new cars. This could undermine long-term new vehicle sales. Higher EV prices could also slow mass

adoption timelines if pricing becomes uncompetitive against traditional gas cars. Additionally, North American automakers heavily reliant on truck and SUV profits may face share threats from imports perceived as better price-value options.

Long-Term Industry Impacts
Long-Term Industry Impacts

some additional details to expand on the topic of above-MSRP pricing

Consumer Rights and Advocacy

  • Groups like the Consumer Federation of America advocate on behalf of car buyers facing arbitrary fees. They’ve lobbied some states to enact anti-markup laws and educate consumers on negotiating tactics.

Impact on Different Socioeconomic Groups

  • Lower-income consumers have less ability to absorb several thousand in unplanned costs. This disproportionately restricts newer vehicle access, widening the wealth gap in personal transportation options.

Global Perspectives

  • While supply issues are global, above-MSRP pricing is less common in markets like Europe with looser dealer controls and more manufacturer pricing transparency. However, some Asian markets like Japan sometimes see minor temporary ADM fees.

Environmental Impact

  • Higher new vehicle costs could delay mass EV adoption by making pricing less affordable and competitive versus gas models. This risks prolonging dependence on internal combustion vehicles.

Dealer-Customer Relationships

  • ADM practices damage long-term loyalty and reviews. Some dealers explore alternatives like vehicle-attached financing to recoup profits while maintaining transparency and customer satisfaction.

Technological Advancements

  • Blockchain registry and AI could bring more data-driven pricing models removing dealer discretion. This increases transparency, trust and dealer accountability on customer-agreed costs.

Regulatory Outlook and Future Trends

  • Stricter anti-gouging laws and mandated disclosure rules may come from movements in states like MA and NJ. Federal oversight remains unlikely due to lobby pressure, but transparency regulation could grow.

Dealer Transparency and Communication

  • Upfront discussions on regional market factors and average fee examples regain customer understanding and goodwill versus surprises. This maintains the bargaining relationship.

Impact on Financing and Affordability

  • Higher prices push more buyers to long-term loans, risking underwater positions if used values drop. Affordability calculations change, restricting vehicle access over the ownership life.

Future Market Predictions

  • Most experts foresee persistent supply constraints through 2023 maintaining dealer leverage, though transparency regulation and inflation pressures may soon curb excessive arbitrary profits. EVs may see larger price breaks to hit mass adoption timelines.

FAQs

Is it normal to pay more than MSRP on a car?

It has become more common in recent years due to tight inventories empowering dealerships. However, paying over MSRP is not necessarily the norm historically. Overt pricing above MSRP can frustrate customers who are used to negotiating discounts. But supply constraints have temporarily given dealers more leverage to charge premiums in many markets.

Should you pay MSRP for a new car in 2023?

For in-demand models where inventories remain limited, paying MSRP or above may be unavoidable if you need a vehicle. However, it’s still worth trying to negotiate below MSRP if possible, as dealers have profit margins built into the price. Be prepared to walk away from unreasonable above-MSRP fees or explore alternatives like smaller dealers or auto brokers that may offer better deals.

Why are dealers charging over MSRP?

Car dealers face rising costs and squeezed margins. Tight inventory gives them negotiating power to charge higher prices that boost profits. This offsets revenue lost from fewer sales and lower used car values. High demand also allows premiums with little resistance. While unpopular, above-MSRP pricing is an effective business strategy for profit-focused dealerships in supply-constrained times.

Why are cars selling above MSRP right now?

Ongoing chip shortages are severely restricting new vehicle output. With few alternatives and months long waits, buyers feel pressure to pay elevated prices rather than lose their desired vehicle. Dealers capitalize on this urgent demand in lean inventory conditions, allowing premiums customers will reluctantly accept to drive the purchase. As production remains limited industry-wide, dealers maintain pricing leverage to sell above MSRP.

Conclusion

In summary, above-MSRP pricing has become a common industry practice in recent years as a result of complex market dynamics impacting both dealerships and consumers. Tight new vehicle inventories have empowered dealers to charge

premiums that maximize profits during supply constrained times. However, the lack of pricing transparency and arbitrary nature of some markups understandably frustrate buyers. Looking ahead, it remains unclear how long microchip shortages

and inventory shortfalls will persist, maintaining high dealer margins. As supply normalizes, regulatory pressures may curb excessive discretionary fees that widening socioeconomic inequities. Technological advances also could disrupt

traditional pricing models through increased data transparency. Yet dealers still face their own margin pressures even in normal times. Striking a balance between business needs, consumer fairness, and future market forces will be an ongoing challenge.

More open communication and independent pricing oversight seem necessary to regain customer trust long-term. Whether through regulatory, technological, or competitive changes,

the auto retail model may need to evolve its pricing approach to remain sustainable and inclusive for all stakeholders in this shifting industry landscape.

Related posts

Leave a Comment