Q1 Returns—Stop “Defective” Deductions

The first quarter (Q1) is when the holiday rush finally shows up…in your deductions report.

Returns spike. Documentation gets messy. And “defectives” suddenly becomes a catch-all label that can hide everything from true product failures to shipping damage to policy abuse.

Here’s the part most teams miss: this is not just a customer experience issue. It’s a margin issue. The National Retail Federation (NRF) estimates $849.9 billion in merchandise will be returned in 2025—about 15.8% of annual sales. Their research also notes that 19.3% of online sales are expected to be returned, and 9% of returns are fraudulent.

That volume and pressure tend to roll downhill. Toward suppliers.

The “defectives” problem in plain English

Retailers need a way to process returns, damaged items, and unsellables quickly. So they standardize categories, use claims programs, and push costs back through deductions and debit memos.

Sometimes those deductions are valid. Sometimes they’re not. And sometimes they’re “partially valid,” which is where a lot of money quietly disappears.

If you’re in consumer packaged goods (CPG), even a small percentage swing matters. Industry guidance commonly puts chargebacks in the 2%–10% range of supplier revenue, depending on category and compliance maturity.

That’s not back-office noise. That’s growth capital.

A quick fictional example (for illustration only)

Fictional example: You crushed December with a top item. In January, you start seeing “defective/unsaleable” deductions. The photos are grainy. The quantities don’t match your shipment history. The claim window is tight. Your team is already tied up with the year-end close.

You don’t have a “returns dispute package” ready—so you either eat it…or scramble.

Q1 is where the scramble becomes a habit.

Why Q1 makes this worse

1. Volume hides errors. More returns means more miscoding, more duplicates, more “close enough” claims.

2. The evidence decays fast. Carrier scans, receiving notes, store-level details—harder to retrieve as weeks pass.

3. Fraud and “policy bending” creep in. NRF research notes that a meaningful share of returns are fraudulent, and a surprising portion of consumers believe bending return rules is acceptable.

When retailers tighten controls, suppliers often see it as more claims, stricter proof requirements, and faster auto-debits.

The Returns-to-Deductions Triage Map

When a claim hits, don’t start with “dispute or accept?” Start with “what kind of event is this?”

Category A — True product defect

• Indicators: repeat failure patterns, consistent lot issues, quality documentation aligns

• Best response: validate root cause, isolate lots, document corrective action

Category B — Shipping damage (not product defect)

• Indicators: crushed cases, pallet impact, temperature excursions, handling notes

• Best response: shift the conversation to logistics proof (carrier, receiving condition, photos)

Category C — Handling / shelf-life / store process

• Indicators: localized clusters, “unsaleable” without defect evidence, late rotation issues

• Best response: require store/DC-level documentation; watch for patterns by facility

Category D — Policy abuse / weak substantiation

• Indicators: vague descriptions, missing photos, inconsistent quantities, duplicates

• Best response: dispute with a clean, standardized package and ask for the required proof

This sounds basic—until you realize most teams treat everything as Category A. That’s where the money leaks.

Build a “win-ready” dispute package (before you need it)

At Harvest Revenue Group (HRG), we see the same issue repeatedly: teams lose disputes not because they’re wrong, but because the proof isn’t assembled as the retailer expects.

A solid Q1 package typically includes:

• Invoice and deduction/debit memo reference (clean linkage)

• Item identifiers and shipment details (lot/date codes if applicable)

• Proof of delivery (POD) or carrier confirmation (proof of delivery is your friend)

• Receiving condition proof (photos, exception notes, temperature logs when relevant)

• Prior dispute history (to prevent double-dips)

• A one-page narrative: what happened, what you’re disputing, what you’re requesting

Make the package repeatable. Boring wins.

The Q1 metrics that keep you out of the weeds

Pick three metrics and review them weekly for the next 6–8 weeks:

1. Claims rate by retailer and facility (where is this actually happening?)

2. Win rate by claim type (stop spending time where you can’t win)

3. Days-to-close (slow disputes become write-offs)

The punchline

Q1 returns will happen. The question is whether they become deductions you can’t explain.

The suppliers who win in Q1 don’t have magical software or unlimited staff. They have a simple advantage: they treat returns as a controlled process, not a surprise.

And when the volume gets high, they bring in specialists to validate claims, assemble retailer-ready documentation, and pinpoint root causes so the same deductions don’t recur throughout the year.

That’s the work HRG exists to do—quietly, methodically, and with receipts.