How do productivity and output quality associate within a firm and contribute to firm growth? The literature usually implicitly assumes that firms produce a single product and masks the heterogeneity within firms. This paper proposes a novel method to estimate plant-product level productivity and quality along with demand and production function parameters for multi-product firms. Our method allows us to decompose the sources of within- and across-firm heterogeneity. The method is based on estimating equations formed from the firm’s profit maximization conditions. We apply the method to a dataset of manufacturing industries in Mexico during 1994 to 2007. The result highlights a trade-off between productivity and output quality within firms, which we define as the cost of quality. Once accounting for (the cost of quality), products closer to the core competency of a firm have both higher quantity-based productivity and quality. The cost of quality is higher for products with higher markup, and it decreases with product age. In a counterfactual exercise, we show that a reduction in the cost of quality can lead to substantial aggregate productivity gains, especially due to within and across-firm reallocation.