customer threatens to spread ill rumors if he doesn't get refund?

Give him the refund

I'm gonna go against the grain here.

You need to stand your ground at some point. People will have negative things to say at some point. You need to set the record straight when bad things get said.

Customers are not the only ones that will talk trash about you, ex-employees might. Competitors too. Just wait 'till you get a competitor's employee saying outright lies about your product, that will really get your blood boiling! It will make you even madder if you don't learn about it until many months have passed and many people have seen it.

If I were you, I'd do the following:

• Tell the guy once and for all what the rules he agreed to are, and he violated them so he's out of luck in trying to use your software for illegal and whatever use violates your terms of service. End of conversation. Why waste time with someone who never will get it? Why should you take the hit for someone else's lack of comprehension? There's lots of people like this out there, might as well start dealing with them.

• Set up Google alerts for the name of your product, the name of your company, your name, etc... If anyone mentions your name anywhere where a search engine can get to it, you will learn about it. You'll get an email from Google with a link. Follow the link and set the record straight. Post your whole terms of service, and repeat to the world what you told him. Say in the closing of your reply that you will not read any replies from this guy since he insists on misusing your product and your goal is to set the record straight, not rehash a petty fight. If you post in a professional attitude, you will not even need to go back to reply to whatever the guy's reply to you is (You already said all that mattered).

If you do it well, the guy will post in a couple places, you will hunt him down and eloquently and professionally state your side, and that will be the end of it. He will grow tired, and you will have some publicity because now more people know about your product and they know it is created by someone who is not only a professional, but was able to hunt this guy down and set the record straight.

I think you should bite the bullet and do this now, since you should be watching out for what is said about you and your company all the time anyway. It is to your detriment to ignore whatever is already being said, no matter who is doing the talking.

Give him the refund and be happy to be rid of him.

Make sure he knows it is not the threat of rumors, rather that you just don't want unhappy customers that made your decision.

I'd give him the refund. You should always aim to have customers believe they were 'treated right', even if the service didn't provide what they thought.

Think of it as karma or an investment in a chance of a positive outcome. Either way, I think it pays off in the long run.

Why bother with any possible out-lash from one unruly customer. Give his money back and walk away. If you don't and he makes good on his threats you could have a much worse problem on your hands than losing a few bucks. Seems like a no-brainer to me...

I am a firm believer in doing the "right thing." What is the right thing you ask? That is to look at the situation from all sides and stick to our companies mission of providing fair, honest and excellent service. Unfortunately, almost everyone here recommended rewarding bad behavior, and the nice customer that asks will get nothing. This is why these type of customers threaten all of us--because many companies have trained them to complain and be unreasonable--thus perpetuating the cycle and making this not about the one customer but all your customer issues.

The web works both ways as Gabriel so eloquently points out. Almost everyone here looks at this one situation and says it is not worth their time. I say you must spend the time on these situations or you will lose every time and what is the point of warranties, supervisors, managers or rules if you do not stand by them when it is completely appropriate. All of the people that you just "pay and move-on" will tell everyone to fight because you do not take a stand and will give in. The unreasonable people that we are talking about do not take into consideration that you gave in. They will say bad things anyway. It is as naive as to assume that if you leave a dollar bill on the passenger seat, that no one will break a car window for a dollar. You do not realize that they do not weigh the cost of your window against the dollar, it costs them nothing.

I strive to imbed my mantra into our CSR's that we should try to turn every situation into a win-win-win (customer-company-CSR) and if it is not possible, that does not mean someone or anyone has to lose. I do not believe backing someone into a corner is a good idea even when in the right, I want to allow them the opportunity to gracefully exit so I preach to our staff to offer some consolation, an olive branch if you will, even when we are totally within right to do nothing in order to show that even though we are in the right we also care enough to compromise without compromising our principles.

And, when they do post do exactly what Gabriel stated. This will pay off more than than you can believe and if you do not you will spend much more time and money just giving in.

Gabriel I stand with you.