From Hedging to Building: Creating a Recession-Proof Practice
Despite its inherent importance to products and experiences, UX research's long-term viability requires case-making by practitioners. In other words, aligning the outputs of research to the wider business's goals. Claudia Natasia walks through one way of doing this, linking research activities to direct, monetary benefit and savings for the company.
There is an 80% chance that the United States will enter a recession according to a recent study by Johns Hopkins University. We're already beginning to see the effects of the recession today, for example, the three x increase in cost of borrowing or interest rates, which is the highest since the financial crisis of 2008. In startup world, we're also seeing a 20% decline in venture capital funding. And for companies in the public markets, they're experiencing a 20% decline in the stock value or drawdowns in S&P 500, which is the worst first half since 1970.
And finally, the United States is predicted to have 0% gross domestic product growth by 2023. But all of these dismal statistics about a recession aside, periods of recessions are usually followed by periods of economic growth and strong developments. And similar to how the US is predicted to have 0% growth in 2023, the United States is also predicted to have a comeback at the end of the decade and have positive 2.3% GDP growth by 2029. If you look at this chart, you'll see that for every trough, which signifies a recession, is followed by even greater increases in economic development and just the overall growth of the economy in general. But what does it take to get from rock bottom and achieve new peaks?
Companies that invest heavily in research and prioritize research in their development cycle are more likely to survive periods of recessions, thrive during the recessions, and thrive during the strong economic growth that follows. For example, these type of companies experience 10% lower drawdowns, which means they experience 10% lower impact to their stock price during bear markets and markets that are fraught with uncertainties. And aside from research, what do these companies exactly have in common? What makes them able to survive market uncertainties and thrive?
These companies invest and build efficiently, and that's what I'm going to teach you all today. I will be sharing three different frameworks that shows how we can build research practices to help organizations invest and build efficiently. But to do that, we need to understand how we can measure whether our research is having financial impact in our organizations. If you've listened to my talk before, particularly at the UXR Conference, you're probably more familiar with this term, return on equity. It's a term that I introduce when I describe the UXR evaluation model that I've created in the past few years to measure the impact of research and UX investment in a financial sense.
But for those who might not be as familiar with return on equity, let's do a quick overview. The way to think about return on equity as a metric is to think about the housing market. If you were to invest in a house, like let's say you're buying your home, you'd hopefully want your home to accrue value over time so in the future you're able to sell it for a higher price, or if the value increases, you might be able to take a loan to purchase your second home over the increase in the equity value of your home.
So that's basically what return on equity is. For every investment that investors or even the market, even yourself if you invest in a market, invest in a company, the goal is that that investment will grow over time. The formula for return on equity based on the UXR valuation model that I created is a function of net operating income and leverage. If we start by defining net operating income, it basically talks about how well businesses are creating value from the cost that it accrues. The way I think about it is like one of the shows I watch very often with my husband, the British Bake Off. If you watch the British Bake Off, you know that the second round of the bake off in every episode is usually a technical challenge. Every single contestant gets the same ingredients with minimal instructions on the recipe, and they have to create something out of the ingredients. For example, in this example, I think it's scones. So they had to create scones from the same ingredients with minimal instructions.
And usually, some contestants do better. They're able to produce more and get more results from the same instructions, the same scenario. That's exactly what net operating income describes. Certain organizations may have similar funding, similar background, similar situations, but for some reason, they're just able to produce more value.
The second function in the ROE calculation is leverage, which describes how well businesses are minimizing risk. When I think about leverage, and because Halloween is coming up soon, I think about these signs that I see in my neighborhood. I was walking my dog the other day and there's just ghosts popping up all over the place and beware of zombie sign. If you're in the Bay Area and you hear someone scream outside, it's probably me. Anyways, these zombie signs don't just apply to Halloween decorations. They also apply to companies, and it's a pretty common way of describing companies that are called zombie companies. These are the companies that aren't actually producing value. They may be producing some revenue but not enough to justify their costs. But for some reason, especially when markets were great, when interest rates were low, they were able to tap into capital markets to get funding to survive. But what happens when markets are banned? What happens during periods of recession when it's very hard to get funding because interest rates are higher? These types of zombie companies that can't provide value becomes highly risky.
How does a recession impact ROE? There's two ways. Now, you're all familiar with a net operating income definition, and so when we think about how recessions impact net operating income, we can think about the examples of sales declining during periods of recession, making net operating income decrease. And in terms of leverage, as you saw, interest rates have increased by 3X, which is the highest since the 2008 financial crisis. And as net operating becomes negative, leverage also gets higher because the cost of borrowing gets higher, making it a double-edge sword of a very difficult time.
But research can help companies thrive during these difficult periods. The two questions that researchers should be asking right now are, "One, how can we reduce risk as a company? And two, how can we expand value in our organization?" Let's start by talking about risk. I mentioned earlier that the two major traits of a successful company is that they invest and build efficiently. We're going to start by talking about how to invest efficiently. You may have seen this typical recession paradox in your organization or in past organizations you've been part of or you were exposed to periods of market uncertainties. The recession paradox is that there is a need for the organization, for the company to improve profit margins, to improve the amount of revenue we can extract for every value of cost that we accrue. However, at the same time, the organization is also subject to budget reduction. So we have to do more with less. We have to improve margins, but we're also seeing a 20% reduction in budget. So how do we do this? How can research help inform how we can efficiently solve situations like this?
In this particular example, this is a case study from a team that I led, we wanted to reduce cost and productionize certain customer service initiatives, because customer service initiatives can actually be quite expensive, especially if you work for a larger organization. And part of helping the internal customer service team is figuring out how we can productionize a few of their tasks, build products to help support them so they can do their job more efficiently. What the research team did here was this amazing study, and I'll introduce the framework after this, but basically it was a survey, which is a typical method that us all researchers, whether market researchers, UX researchers, have done in the past, survey of the client services, customer service team members. We created this metric to measure impact from the survey data. And finally, we created a metric to understand costs.
By the way, before I continue, if you have any questions about this, feel free to drop it on the chat and I'll pop in right after to answer all of those questions. Feel free to reach out to me on Twitter also if you'd like to talk about these more deeper before we get into the frameworks. And so, a combination of the survey and the metrics we created led to the creation of the first framework that I'm sharing with you all today, called the cost efficiency matrix. The y-axis on this cost and efficiency matrix was the cost definition. And in this particular example, it was the potential dollar value that's reduced to the company should we invest in this particular feature to help our customer service team. And then the x-axis shows impact, which measures the efficiency rating. The efficiency rating was a question that was added into the survey to the customer service team to understand if we were to improve this particular task, how much more efficient would they perceive their job to be?
What we were able to do is create four different priority quadrants that shows how exactly we should be investing our time with the minimal resources that we have. Obviously, if we were to invest in priority one, we would be prioritizing something that saves the company highest costs and also leads the highest impact for the users we're building for, which in this case is our internal customer service team. Priority two does something similar. Even though the impact may be lower, we would still be saving the company higher costs. This is a really excellent matrix that you can use to showcase your insights in a way that shows how to prioritize accordingly, especially during periods of recession when cost may be a more sensitive issue.
IT doesn't just stop here, it's not just for internal teams or it's not just for these two metrics or these two definitions of cost and impact. Because there's plenty of other ways you can use a cost and efficiency matrix, and I've laid it out here. You can use this matrix when you're thinking about how to prioritize features. You can use this matrix when thinking about how to prioritize UX improvements. And the thing is, even though the matrix may be new, even though this may be the first time you're seeing it, the methods that go to input all of the data in these matrix are familiar methods to us researchers, like surveys and interviews.
Let's talk about the next section, expanding value. Again, successful companies, those that thrive during periods of recessions and the periods of growth after, both invest and build efficiently. We've discussed an example for how we can utilize research to help companies invest more efficiently by the way of the cost and efficiency quadrant. And now we'll talk about how we can utilize research to help companies build efficiently.
Let's go back to the typical recession paradox. As usual, organizations often come across a list of backlogged items. You've probably seen whether it's an Airtable list, an Excel list, Google Sheets, whatever the format is, a list of 100-plus, sometimes 1,000, I've seen thousands of these, features, UX improvements, bugs that just needs to be collectively addressed by the organization. But in a recession, in addition to the backlog of items, we also experience budget reduction sometimes. So how do you reconcile both of this, doing more again with less?
The second framework I'm going to introduce everyone to is the value frontier. So the value frontier describes this function where if organizations were to invest in a particular feature and develop that feature, the goal is to really get this feature to a state where we are optimizing value to the business by way of revenue or whatever financial metric you want to use to measure value to the business, in this case we'll use revenue as an example, and value to the users. So anything on the dotted line is the frontier. Our goal is to get from the arrow, sometimes we may start at the lower end of the arrow, closer and closer to the dotted line where we're extracting more value for our organizations while also unlocking more value for our users.
How can we do research to find out where we need to go in this value frontier? In this particular example, I'll show you next, we'll be talking about how a organization was able to use research to get from feature A to feature A.2, ultimately getting closer to that value frontier.
For this particular research project, it was a pure user research project. The team did a contextual inquiry and a usability audit of the product in the market, and it was a in-store loyalty program. So if you've been to, let's say, a boba tea store and you input your phone number on a tablet, you join their loyalty program, you can accrue points and hopefully get a free boba. The user research data was combined using revenue analytics data, ARPU, and then finally product analytics data, MAU, monthly activity count.
What the researchers discovered was through all of the combination of insights that an in-store loyalty program wasn't enough. There was opportunities to expand the product to also take into account mobile payments, paying using an app that the users already used to sign up for the loyalty program anyways. And research discovered this actually earlier before the pandemic, and ultimately led to creation of value, expanding the product from just being a loyalty program to also a payments and loyalty program.
When the pandemic started and everyone had to start paying using mobile payments, it was really the driving force that helped the company survive. So in addition to adding value to the users, this investment that was driven by research also added value to the business and ultimately led to a multimillion-dollar acquisition in a terrible market at the beginning of the pandemic.
But what if your organization doesn't have revenue data or product analytics data yet because maybe you're newer and you're starting out and you haven't measured anything retroactively. The third and final framework that I'll introduce is the Kano model. This was actually a model that was created a few decades ago, but I have a little version of an update that I did myself to better understand the Kano model and how we can integrate it to our research practice.
The Kano model basically uncovers three different types of features. The first is what's called a basic threshold feature, and what I personally called value maintenance. If we were to invest in this particular feature, we'd basically maintain the value of our product. As you can see, when we start investing in it, the function exponentially... or not exponentially, but the function does experience a strong increase. The more we invest in it, it eventually tapers off in terms of customer satisfaction, because customers just expect these features to be there, but they're not there to begin with. And that's why it just simply maintains value.
And then the second feature that the Kano model helps us identify are performance features. The more we invest in it, the more in a linear way the customers will be satisfied by our product or our service. And then finally, the Kano model identifies delighters or value accelerators. These value accelerator features, the more we invest in it, you'd see that exponential increase eventually over time, making customers more satisfied. These are the features that surprise you. You don't necessarily expect it, but when you use the product and you notice it, you immediately feel more drawn to the product and experience.
And so, the Kano model identifies these three different features and allows us to prioritize in periods of market uncertainties where budget is more tight that we need to start by maintaining value right now, investing in areas, the P1 basic threshold areas, where we maintain value, and then eventually investing in areas where we can add value and prioritizing accordingly with how much we want to invest in value accelerators as well. So the ideal situation is to have a combination of all of these priorities while, of course, prioritizing value maintenance first and then having a combination of P2 and P3s to invest in the future, especially for the periods of growth that follows a recession.
To do the Kano model, you'd be asking two questions, a functional question and a dysfunctional question. The dysfunctional question is just the opposite of the functional question, and I've added an example here of how you do it for a social media app. And after asking all of these questions for the different elements of your features or your experience, you'd be scoring it based on the scorecard to uncover those three areas that I mentioned. So which ones are the value maintenance, which ones are the delighters, which are the value accelerators, and which ones are the value added features which are the performance?
I know that there are, of course, different arguments or different sides to a survey, but I've personally found that the Kano model is effective as long as you accurately design and write the questions. I'm happy to talk even deeper also on the Q&A for how exactly to write those questions to make sure that we extract the most valuable insights.
Let's do a quick recap. It's very important right now during periods of recessions for companies to invest and build efficiently so they can thrive and grow during the periods of economic growth that follows a recession. The two questions that researchers should be asking right now are, one, how can we reduce risk? And two, how can we expand the value of our organization? I introduced three frameworks for how researchers can invest or change their practice during the spirit of time to answer those two questions: reducing risk through the cost and efficiency matrix, adding value to an organization through the value frontier, and the Kano model.
I'll end by sharing a story. Not long ago, there was this one item that just popped out of nowhere. A few people started collecting it. And then over time it started growing in value. The people who held onto this item longer and longer were surprised by how much this item is worth. People started gifting it to their loved ones as a very high value gift, and those that weren't able to have this item became really jealous and envious. "Why are all of these people having this item? Why is it growing so much in value, and how can I get it?" And more and more people tried to get this item, and that drove the value even higher, generating wealth for those that held from earlier on without knowing why. How is this item actually generating all of this wealth and all of this value? Can anyone guess what this item is on the chat?
Some of you may have guessed cryptocurrency. But actually, the item is this humble tulip. This is a photo of a beautiful tulip garden I took in Central Park, New York about eight years ago, and I remember when I stopped to take these photos, my friends were saying, "Why are you taking a photo of a tulip? You can just get it at Trader Joe's." And that's crazy because about 200 years ago or so in Europe, these tulips were worth what cryptocurrency is worth today. The reason why I'm sharing this example and the story is because the definition of value, the generation of value can happen anywhere. Companies can generate value, companies can continue to create value, but companies can also easily lose value. But as research practitioners, we have the power to help companies redefine and continue to unlock value.
I'd like to encourage everyone here to utilize research and to empower researchers and build research practices that unlock value and continue to help companies thrive. Thank you, everyone, for your time today. Feel free to tweet me with any questions. I've also included my website with upcoming events. There are two exciting events that's upcoming, one a deeper class on the UXR evaluation model that I'm hosting, and finally, an end-of-year discussion where we'll be meeting with researchers, founders, product managers, designers, et cetera, to talk about fiscal year '24 strategy for building more resilient businesses utilizing UX research. And if you're in the Bay Area, I would love to have you there in person. Thank you so much for your time today.