OODA Cycle as an Effective Tool for Making Price Decisions

When faced with the need for rational decision-making in a rapidly changing environment, it's beneficial to understand the methodologies used in extreme scenarios. If these methods are effective in the most complex situations, they'll undoubtedly be effective in our more routine scenarios as well.

One such method is the OODA loop, short for Observe, Orient, Decide, Act. This mental model, also known as the Boyd cycle, is named after its creator—American Air Force Colonel and strategist, John Boyd.

One of the most distinguished U.S. Air Force jet pilots of the 1950s, John Boyd penned his own combat flight manual, later adopted by air forces worldwide.

Boyd wasn't an armchair strategist. His ideas were forged from extensive experience as a fighter pilot, earning him the nickname "Forty Second Boyd" due to his ability to win any air battle in less than forty seconds.

In the words of General Charles Krulak, Boyd was a "brilliant mind that made an unparalleled contribution to American military art...from John Boyd, we learned about the competitive decision-making process on the battlefield—compressing time and using time as an ally."

Boyd's method has proven its efficacy in the ruthless laboratory of military conflicts. Military leaders and strategists invest considerable time and resources into decision-making processes. If these weren't effective, they would be quickly replaced with alternatives. Yet, Boyd's method has not only remained in the military arsenal but has proven effective in civilian sectors that value rapid decision-making in fast-changing environments.

The OODA loop stands for Observe, Orient, Decide, Act. This cycle consists of four processes and assumes the repeated implementation of these action loops—demonstrating the principle of feedback.

Practical application has shown that OODA is a universal behavior algorithm applicable in many areas of human life:

• First, observe the situation.
• Next, analyze or orient yourself to the situation.
• Then, make a suitable decision.
• And finally, act.

The subject (individual or organization) who can swiftly cycle through the OODA loop, responding to unfolding events faster than their opponent, can "penetrate" their opponent's decision-making cycle and gain the upper hand.

Boyd developed this concept to explain how to direct one's energy to defeat an opponent and survive. He stressed that the "loop" is actually a cycle of interconnected loops that need to be continuously worked through during combat.

Currently, this cycle is actively used in commerce and learning processes.

The OODA cycle can serve as a useful practical method when forming a pricing strategy in a highly competitive environment.

Let's look at how to apply this algorithm to price management step by step:

The first step is to observe the situation with the aim of building the most accurate and complete picture possible.

For instance, a fighter pilot must instantaneously answer the following questions:

• What's directly impacting me?
• What's impacting my opponent?
• What could potentially impact either of us in the future?
• Can I make any forecasts?
• How accurate were my previous forecasts?

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In terms of pricing, this means implementing a system for observing the market. In pricing terminology, observation is referred to as monitoring competitor prices.

Observing can be done manually, scrolling through websites in search of information necessary for analysis. But considering the dynamics of price changes and the quantity of items that require monitoring, it's desirable to speed up this task as much as possible. Automated monitoring systems handle this perfectly.

We've prepared a checklist to help you understand the existing monitoring methods and determine which one to choose.

To orient is to recognize any obstacles that may hinder the other parts of the OODA cycle.

Orientation is the process of evaluating data in accordance with context, seeing the world as it really is, maximally free from the influence of cognitive distortions and labels. You will have an advantage over competitors if, before making a decision, you always perform orientation, instead of acting immediately.

Boyd asserted that if you orient properly, this may be enough to change an initially unfavorable situation in a confrontation with an opponent, even if you have fewer resources.

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In pricing, this stage means that it is not enough to collect operational information about prices. To properly assess your position in the market relative to competitors, it is necessary to establish an effective system for processing the received information.

This should be helped by an analytics system that performs the initial processing of raw data and consists of flexible tables, dashboards, and reports.

At this stage, the ability to determine which information is just noise and is irrelevant to the current decision becomes especially valuable.

Priceva's price analytics service distributes the received data, assigning different price statuses to products, from the lowest to the highest. And the dashboards clearly display this.

A consequence of the fact that retailers are not good at working with rich data sets is that more than half of promotional campaigns turn out to be ineffective. Nielsen has calculated that around 60% of promotions do not pay off.

Having oriented yourself in the collected and processed information about the competitive situation, you can move on to the third level.

There are no surprises at this stage. The previous two steps provide a basis for making an informed decision. If you see several options, you need to use observation and orientation to choose one.

Boyd warned against choosing the very first conclusion you came to: we cannot make the same conclusion over and over again. This part of the cycle should be flexible and open, and rely on all the information available to you.

Probabilistic thinking makes you ask, how confident am I in this assumption? What information affects this confidence?

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In pricing, once clarity is obtained on how the current competitive situation looks at this point in time, a decision needs to be made: to leave prices unchanged or to reprice.

Such a decision is usually made with reference to a pricing strategy that has been previously developed and approved in the company. Which in turn relies on:

● key company objectives,
● the competitive balance of power,
● current demand,
● and the pricing method being applied.

A thoughtful strategy and the data obtained in the first two stages allow you to develop the most effective decision on the third stage, which items in the product matrix to change the price of and by how much.

At this stage, the specific developed plan is implemented. As a result of this action, the external environment changes, which again affects the entire system. The principle of feedback is implemented.

In pricing, the action stage can be considered the actual process of changing prices or repricing.

For the OODA loop to rotate faster and give you a competitive advantage, repricing should also be automated.

The method has three key advantages:

Fighter pilots need to be able to make many decisions instantaneously. They don't have time to weigh all the pros and cons or consider options. As soon as the OODA loop becomes part of their mental toolkit, they can go through all its 4 stages in a fraction of a second. Speed is a vital element of military decision-making.

When using the OODA loop in pricing, we obviously have more time than a fighter pilot. But Boyd emphasized the importance of decisiveness, initiative, and autonomy. These are universal qualities, effective even when conducting price competition.

Fighter pilots face dangerous situations for which there is no playbook. The enemy may use an unconventional strategy, a new type of weapon or aircraft, or behave irrationally. Boyd insisted that uncertainty doesn't matter if we have the right filters to recognize what the maneuvers say about the intentions and skill level of another pilot.

In managing pricing policy, we also often have to make decisions under conditions of uncertainty. If we can't handle uncertainty, we get stuck at the observation stage. This happens when we know we need to make a decision, but are afraid of making a mistake.

However, it's important to recognize that actions under conditions of uncertainty are inevitable. If we truly have the right filters, we can account for uncertainty at the observation stage, recognize those elements that are under our control.

Unlike pilots, we have the opportunity to make a mistake and then correct it.

When you act fast enough, others will find you unpredictable. They will not be able to understand the logic of your decisions.

Boyd recommended making unpredictable changes in speed and direction, he wrote: "We should operate at a faster tempo or rhythm than our adversaries... Such activity will make us appear ambiguous (unpredictable) and thereby generate confusion and disorder among our adversaries."

Just as in soccer you cannot apply the same game strategy dozens of times, in warfare, rigid strategies become useless after a few uses - adversaries learn to recognize and counter them.

The OODA loop can be used indefinitely, because it is a flexible strategy, not tied to any specific maneuvers.

Boyd was influenced by Sun Tzu's "The Art of War" and drew many ideas from this ancient treatise. Sun Tzu presents war as a path of deception, where the best strategy is the one that the enemy will not be able to predict. Be unpredictable in your pricing strategy, don't let your competitors decipher it.

Start applying the OODA loop to tasks related to pricing and observe what happens. You will start noticing things that you didn't pay attention to before. Before moving to the first conclusion, you will pause to analyze your biases, account for additional information, and consider the consequences.

If done correctly, the more you do it, the better you will get at it. You will start making better decisions at full strength and see faster progress.