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Why GoPro's New $399 HERO5 Black Won't Hurt Margins

By Steve Symington – Sep 24, 2016 at 5:00PM

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The action-camera maker should be able to sustain its margin profile despite aggressively pricing its best new camera.

GoPro's new camera lineup from left to right, the HERO4 Session at $199, HERO5 Black at $399, and HERO5 Session at $299. Image source: GoPro.

Nearly two years after launching its massively popular HERO4 Black and Silver cameras, GoPro (GPRO -2.21%) made waves earlier this week by revamping its capture device portfolio with what company founder and CEO Nick Woodman described as the "largest introduction of products in our history."

More specifically, GoPro not only introduced its long awaited Karma drone but also showed off two massively improved camera models in the HERO5 Black and HERO5 Session. In addition, GoPro launched its compelling new GoPro Quik editing app, as well as a cloud subscription service called GoPro Plus.

Just one ($399) "problem"

But as I briefly discussed shortly after the announcement, GoPro's new cameras seemed to draw a surprising amount of ire from analysts and investors -- and not because of their new features. Rather, GoPro is sticking with its "good, better, best" strategy consisting of three cameras: The HERO5 Black at $399, the HERO5 Session at $299, and the HERO4 Session at $199.

So what's the problem? GoPro's previous camera lineup consisted of the HERO4 Black at $499, the HERO4 Silver at $399, and the HERO4 Session at $199. And the worriers posit that reducing the price of its two highest-end capture devices could hurt the company's margins, especially considering those devices contain GoPro's latest and greatest technology.

To be fair, this new pricing structure enjoys the benefit of positive perception from a consumer's standpoint; they're now able to purchase the exceptional HERO5 Black at the same price as GoPro's previous mid-tier model, even in all its 4K-recording, waterproof, cloud-connected, voice-controlled glory.

According to GoPro management, however, the new, cheaper HERO5 Black shouldn't hurt margins.

Learning from the past

First, when asked during GoPro's conference call with analysts this week about the impact on average selling prices (ASPs) of removing the $499 price point, CFO Brian McGee responded:

Even at the $399 and above price point, the vast majority of that was [HERO4] Silver at $399. So the impact on ASPs isn't quite what you think. And then we have the $299 price point coming in behind that. And obviously with the higher price point on Karma, that's going to help overall ASPs as well.

Recall that in July, GoPro management stated that its cameras priced at $399 and above collectively made up more than half of all units shipped last quarter. But they also confirmed that the HERO4 Session was the country's second best-selling camera on a unit basis, trailing only the HERO4 Silver, which led overall camcorder/camera category sales on a both a unit and dollar basis. Combined with McGee's comments, this indicates that the HERO4 Black simply wasn't pulling its weight at $499. 

But this doesn't directly address the issue of margins. So when asked near the end of this week's call to elaborate on margins, McGee drew on GoPro's past experience:

I would argue that we've been doing cameras for 14 years. When we come out with a camera we try to optimize the costs out of the gate, but there is always room for cost reductions. We did that on HERO4 Session which, quite frankly, was not designed to be at a $199 price point. We were able to take costs out of the system to get its margin profile to where the other lower-end cameras were at the time, which they replaced. So I think we have a history of putting out products that are very well engineered for the consumer at good cost and margins.

GoPro admits that it effectively botched the launch of HERO4 Session last year by pricing it at a too-high $399, only to be virtually forced to reduce its MSRP twice in five months, to the current $199. Yet GoPro still managed to handily exceed earnings expectations with each of its past two quarterly reports, lending credence to McGee's assertion of its cost management skills even as sales plunged from the same year-ago period. 

In addition, while it's not clear just what the margins are on Karma at this point, McGee suggested there's "room for improvement" on the $799 drone's margins as the company refines its production process. As GoPro follows through with these improvements, Karma should only further serve to bolster overall margins going forward.

In the end, then, I think investors can trust GoPro has learned from its past mistakes and is making the right move in aggressively pricing its HERO5 Black camera. Assuming consumers react positively to its new products when they hit store shelves, GoPro's margins should remain healthy going forward.

Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends GoPro. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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