External failure cost is a quality cost related to acknowledging and remedying the defects a consumer detects post product ownership. The costs associated with offering/acknowledging product warranty, repair options, customer support, returned products, penalties for poor product quality, etc. comprise external failure costs.
External failure cost not just comprises costs related to product repair work or replacement, it also accounts certain intangible setbacks resulting due to the error, such as brand reputation damage, loss of customer loyalty, goodwill, impending lawsuits, damaged relationships with distributors or dealers, etc. From a company’s perspective, internal failure costs are far less hurting than external failures, as the latter causes both tangible and intangible damages.