ABSTRACT The business model of the manufacturing industry has undergone significant transformation as the information technology-related Internet of Things (IoT) progresses. How should companies determine the quality of their products in this period? Some reports state that the source of profit shifts from the manufacturing phases to maintenance and operation phases by the so-called servitization of products. Under such a background, in this paper, we discuss the methodology for determining proper quality of products from the viewpoint of minimizing the social loss. First, we refer to Taguchi’s loss function to evaluate the quality of products from the viewpoint of minimizing the social loss. In addition, we highlight a feasibility problem when only one department evaluates the quality of products based on Taguchi’s loss function. Second, assuming that the quality of products is determined by two departments, we propose a novel quality decision model, applying the theory of the principal-agent problem. Third, after comparing the individual optimal solutions based on the proposed model to the whole optimal solutions, we discuss strategies the management should adopt. As a result, although the individual optimal solutions based on the proposed model have a trade-off between the factory-evaluated quality and user-evaluated quality, we showed that companies can realize the first best solutions by ex-post facto measures of management. Based on these results, we concluded that companies can design the environment to properly determine the quality of their products from the viewpoint of minimizing social loss. Keywords Agency problems, moral hazard, quality engineering, quality loss function, Taguchi method, tolerance