[alanstorm]

Run the numbers, calculate the percentage of your income lost, and just consider it another unavoidable cost of doing business. I imagine you don't like paying Paypal, Google Checkout, or merchant account transaction fees, but I also imagine you don't feel personally slighted at having to pay them. Put people exploiting your refund policy in the same bucket.

If this is a subscription service, automate the refund process such that you can you can send a single email with a link that will let them provide feedback, cancel their service, and refund their money.

If you're selling software bits consider a serial number system that will allow you to remotely disable people who have requested refunds. Also, keep your refund policy but stop advertising it. This way you prevent bottom feeders from even knowing it's an option. If you notice this is costing you more sales than you gain, go back to advertising it and re-read paragraph one.