Several years ago I worked for an employer who was struggling with rising health care costs. Just like every other business in the United States, they were looking for ways to manage the year after year price increases. The health insurance innovation they came up with was one that was based on the health of the employee - healthy employees would pay less and unhealthy employees would pay more.
The idea was that each individual had the opportunity to take control of how much they paid for health insurance. The costs of health insurance for the employee were directly related to four health categories: the body mass index (weight), cholesterol, blood pressure, and smoking habits. It was a fair program and employees had opportunities to pass each category regardless of prior health conditions.
But employees naturally disliked this program. It wasn’t that they thought everyone should pay the same for health insurance - they seemed to understand that unhealthy people cost the company more in premiums. They even thought this was a great health insurance innovation. Their problem with the program was with how the program was framed.
The new program was designed so that each health test the employee failed resulted in a health insurance increase of $500 for individual coverage and $1,000 for family coverage. The problem with this was that the entire program was based around a penalty. If you fail a test, you are penalized. If you pass all four of the annual health tests, then all you did was temporarily avoid the penalty. It was a penalty-based program and it was affecting the morale of employees.
As an alternative, a hack, the company could have framed their program as a benefit. To do this, the company would instead reward an employee for each health test that was passed. This positive framing to the same basic program would have provided a better level of satisfaction for those who earned the reward. In addition, the dissatisfaction of being penalized would essentially be removed from the equation. The result would have been an increase in employee morale.
This hack is called gain-loss framing. The idea is that for each product, service, or promotion that involves different pricing levels based on variable factors, a business can decide to frame the variable as either a gain or a loss.
In the gain approach, the base price is set high (at a premium) and reduced for individuals who meet the appropriate criteria. Alternatively, loss framing involves starting with the absolute lowest price and then penalizing those who do not meet the applicable criteria.
Comparing the Two Approaches
Either approach to this health insurance innovation would theoretically result in the same prices for an individual. For example, if I failed two of my health tests, I would pay $2,000 more than someone who didn’t fail any of their health tests. The same is true if I passed two tests as I would still pay $2,000 more than someone who passed all of their tests.
But most people would agree that it feels better to earn two rewards than it does to pay two penalties. Sure, I may only receive two out of four possible rewards, but my natural comparison, or baseline, is achieving no rewards. Therefore, two rewards feels much better than the baseline of no rewards, even though I didn’t achieve the maximum four rewards. As you can see from this example, gain framing often helps to increase customer satisfaction and employee morale.
Alternatively, loss framing also has its own benefits. As loss framing has a natural comparison to not receiving any penalties at all, anything less than the baseline of perfect is perceived as being a negative outcome. This can be beneficial in a number of cases.
For example, if the goal of a business is to sell a product, a sale that comes to an end provides a penalty for not purchasing during the sale period. As another example, let’s look a the health insurance program I explained earlier. if the bottom line goal of the health program is to get people to act and actually become healthier, a penalty may actually drive better results. While the morale may be down, the overall health of employees may actually increase.
Gain-loss framing requires one to carefully weigh the benefits and costs of each approach before strategically designing a program that helps to achieve the bottom line goal. Next time you run a promotion or have multiple pricing tiers, remember the benefits and costs of gain-loss framing. Framing products, promotions, and services in a gain frame helps to increase customer and employee satisfaction while loss framing can help drive one to action.