External failure costs definition

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.