Show the full loop: how you detected the problem, diagnosed it, iterated, and what principle you now apply because of that experience.
Look for honesty and learning: what metrics showed the design was not working, what they did to investigate (user interviews, analytics deep-dive), how they iterated, and what principles they took forward. Candidates who never had a design fail are either inexperienced or not honest.
Reveals growth mindset and humility. The specific failure matters less than the learning process. Ask follow-up: "How do you now prevent similar issues?"