GoPro Inc's (GPRO 1.28%) HERO7 lineup is unquestionably the best in the company's history, but it faces a lot of the same challenges GoPro has faced in the past. Volume has been falling, and customers have been very price-sensitive, which makes it tough to make a profit. It puts GoPro in a Catch-22; it must either settle for low volumes and higher margins, or reduce prices to boost volume and settle for lower margins. 

If GoPro's stock is ever going to recover, it's going to need to execute on a strategy that will balance volume and price, and there doesn't seem to be an easy answer. 

GoPro HERO7 lineup of cameras.

Image source: GoPro.

Picking a path

What management decided early in the holiday season was to go for the volume play, selling the GoPro HERO7 Silver, a memory card, and an accessory for $229.99 as its flagship discount. Now, it's offering the HERO7 Silver for $229.99, or $199.99 with a digital camera trade-in. Both are incredibly low prices for the company's second-best camera, and they are the main reasons management gave weak gross margin guidance for the fourth quarter of 38%, plus or minus 50 basis points. But GoPro feels like it has to trade margin for volume in today's market. 

CFO Brian McGee explained the pricing decision on the company's third-quarter conference call: 

This year we plan to initiate more promotions during the fourth quarter, which will have a negative impact on both Q4 revenue and margins. However, we believe this will further ensure we exit the year at low levels of channel inventory, while preserving profitability in Q4 and the second half.

Note that the decision to discount mid and low-tier cameras is on top of a lower price lineup overall. Two years ago, GoPro's cameras ranged from $199 to $499, and this year, that range is just $199 to $399 at regular price. So, there's a discount on top of already lower prices. There's simply no pricing power for GoPro today. 

The trade-off is lower inventory, according to management. Having too much inventory at the end of the holiday season has led to massive losses in the past, so maybe this is a compromise management felt they had to make? 

Going according to plan...maybe

For the discount strategy to work, GoPro needs to show that it's meeting volume expectations. To that end, GoPro released a glowing but cryptic press release last week touting its Black Friday and Cyber Monday performance for the Hero lineup of cameras. "The company enjoyed strong sell-through of its three-camera HERO7 lineup," according to the release, with HERO7 Black leading in sales. 

What's not stated here is what "strong sell-through" means from a volume perspective. In 2017, the company sold 4.3 million cameras, and in 2016, it sold 4.8 million. Those are the two bars against which investors can measure performance in 2018, and given the fact that management expects a relatively low gross margin of around 38%, it will need strong volume to meet its positive EBITDA projection for the full year. 

Bullish comments after key selling days aren't surprising coming from GoPro; what's surprising is what wasn't said. Management has announced a reduction in guidance and even job cuts at similar times in the past, so this was a good announcement by comparison. It also didn't increase guidance, which would have been a best-case scenario. It'll take until fourth-quarter earnings are announced to tell if the discount strategy is good for profitability long term. 

The good news

One good sign for GoPro is that HERO7 Black hasn't been discounted yet. The camera is still $399.99, and management's comments state that it's still the best-selling camera in the lineup. Premium features like hypersmooth and live streaming keep the camera in demand despite the significantly higher price point. 

For GoPro in 2018, the year will come down to volumes for both the higher-margin HERO7 Black and the lower-margin HERO7 Silver and White. The company has indicated that it can maintain higher prices on its premium camera but needs to discount on lower-end cameras to make a volume play. If that strategy doesn't work, the company could be in real trouble long term.