Registered Post is not worth it for low value items.

Definitely offer it as an option, because some buyers will take it up for their purchases.    Always register items that are of a value that will hurt you to replace or refund should they be lost in transit.  Only you can determine this 'pain threshold' as a seller and it is usually based on your actual cost (rather than the sale value)

When you send lots of items by ordinary mail it is only logical that the occasional article will be lost whilst in Australia Post's care.  Australia Post is not an infallible service.

Sellers need to be prepared to either refund or replace items that are lost in transit.     Work out which option is more cost effective for you in these situations, perfectly_dark007   and state it upfront in  your refund policy that you will refund or replace at your discretion

Lost mail can, and sometimes does, occur but as long as you have a cost-effective and quick solution to such problems you can solve them and move on quickly.  Time is money for a seller, after all - and you want to keep your customers happy. 

The best time a seller can show off their customer service skills is when a problem arises so use these situations wisely.

perfectly_dark007  :  just a suggestion, but have you thought of increasing your item cost to incorporate the postage cost into the price and then making your listings free post?    Your postage cost seems low enough on most items to be able to get away with this.

I hope you are able to offer a solution to this customer and avoid negative feedback.   Just one suggestion though : if a customer actually threatens you with negative feedback via eBay messages, check to see if their threat falls inline with eBay's Feedback Extortion policy.    If you feel it does - be sure to get on to eBay's customer support as they may be able to remove any bad feedback such a customer may leave you

http://pages.ebay.com.au/help/policies/feedback-extortion.html

Thanks mate. In this case we found a compromise (half refund and I was going to repost 2 of the 4 items I still had in stock).

Good advice re the postage too. In the end im simply removing the 'free' option and just charging $2.50 for unlimited items (pretty much the base cost for padded bag/postage, larger orders im happy to simply pay the differnece myself anyway).

You learn something new every day on ebay!