When I was selling my decals, I always shipped first class with a stamp, because the item was completely replaceable and not worth the extra money for DC. I did have the occasional one go missing, and did exactly what you did - send a replacement with DC.
In my case, I didn't mind so much, because I was selling enough volume to offset the loss of the occasional repeat shipment. The darned thing was, that none of the missing items were really missing, just delayed. Buyers are so impatient these days, that they assume something is lost after 3-4 days have passed. In one case (yes, there are still decent people out there), I had one buyer who was so honest that he felt guilty when the original arrived late, and sent me the money to pay for the replacement item.
Unfortunately, there is no way to prevent mail delays or losses, so it could happen again, though to my experience it doesn't happen often. Delivery Confirmation may make the post office more honest, but it still doesn't guarantee delivery. DC is proof that the item was delivered, but not proof that it was delivered to the correct address. I see a LOT of complaints about this in forums, because PayPal accepts DC as proof of delivery when an "item not received" claim has been filed, even though the PO is notorious for mis-delivering items with DC on them.
I've sold over 1,000 decals in the last year, shipped most with stamps, had maybe 4-5 that got "lost," and all showed up eventually. So I wouldn't change your current shipping methods. In fact, I'd bet that the original print eventually arrives safely, and your buyer feels totally stupid for not being more patient.
All that said, on something that is only $1.25, I wouldn't do free shipping. You're losing money at that price. If you want to list prints inexpensively to attract the attention of buyers, I would add a little onto the shipping cost. If you add 50¢, your regular customers won't complain about it.
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Kathy
Kathy