External Failure CostsExternal fail

External Failure CostsExternal failure costs arise when a defect is discovered after the customer receives the service or product. Dissatisfied customers talk about bad service or products to their friends, who in turn tell others. If the problem is bad enough, consumer protection groups may even alert the media. The potential impact on future profits is difficult to assess, but without doubt external failure costs erode market share and profits. Encountering defects and correcting them after the product is in the customer’s hands is costly.External failure costs also include warranty service and litigation costs. A warranty is a written guarantee that the producer will replace or repair defective parts or perform the service to the customer’s satisfaction. Usually, a warranty is given for some specified period. For example, television repairs are usually guaranteed for 90 days and new automobiles for five years or 50,000 miles, whichever comes first. Warranty costs must be considered in the design of new services or products.