What are External Failure Costs?

External failure costs are those costs incurred due to product failures after they have been sold to customers. These costs include the legal fees related to customer lawsuits, the loss of future sales from dissatisfied customers, product recalls, product return costs, and warranty costs. A particular concern is the cost of repairs and servicing, when the seller must take on the cost of sending a repair person to customer sites to make repairs.

External failure costs can be substantial if the result is the loss of customers - and especially when customers tend to buy a company’s products many times.

External failure costs are classified as a quality cost.

Types of External Failure Costs

There are a number of external failure costs, of which the following are the most common:

Customer complaints handling. Includes the resources used to address and resolve customer complaints.
Product returns. Includes the costs of processing and handling returned goods.
Warranty claims. Includes repairs or replacements under warranty agreements.
Product recalls. Includes the costs of identifying and retrieving defective products.
Liabilities and legal costs. Includes the costs of settlements or judgments for product liability claims, attorney fees, and regulatory fines and penalties.
Loss of reputation. Includes the long-term negative impact on brand image and customer loyalty, as well as the costs of marketing and public relations to rebuild trust.
Loss of sales. Includes the cost of decreases in future sales due to negative word-of-mouth, as well as lost revenue from dissatisfied customers switching to competitors.
Customer compensation. Includes the cost of compensation for damages caused by defective products.
Customer support costs. Includes the cost of increased call center or support team activity related to defects.
Investigation costs. Includes the costs incurred to analyze the root causes of external failures.