Hi Kat,
I just had a look through your flickr account and you have some nice shots in there, but, and there's no way to be nice about this particular subject - they just don't work for me. I think someone has already mentioned 'no excuses' and that's bang on the money. As a photographer it's your job to make the shoot work. That's what seperates good professional photographers from semi-pro's or amatuers.
I think your first thought must be to protect your 'name' or 'brand'. You have to be pro-active, always. Get in contact with the people (leaving it just makes you anxious and lets stuff fester on both sides). Discuss the shoot in detail and get to the root of the problem (if you establish there is one) as soon as possible. If you take the initiative you'll diffuse any potential conflict. Being pro-active instills confidence in the client.
You don't want to offer a straight refund - EVER. The client will still be pee'd off and still might bad mouth you anyway. You can just see it now - "
We had this terrible shoot with that Kat photographer and had to ask for our money back. I wouldn't use her if I was you.", even though you offered the refund. My advice for what it's worth would be to spend some real time and effort getting this put right. Offer a re-shoot at no cost and offer them the prints at half-price (or a price that covers your expenses). Insist that they take your advice about location, timings, weather, clothing etc. They are after all buying your expertise.
Secondly, don't worry about making a profit from this shoot, your sole aim is to get these people in a state of mind that they are delighted with your work. I know that sucks, but this is about your image. Advertising is costly and for a small business, as you already have pointed out, word of mouth is the most effective, and not only at building your business, it can kill it in an instant.
You'll need to plan the re-shoot carefully. She's not exactly the smallest lady is she, so you must find a way to make the shots flattering. Some have offered good advice on this thread already. Research online will get you loads of ideas. Look at some of the websites of top portrait or wedding snappers to get ideas. Definitely get yourself on a posing course. If you have friends who are larger ladies ask them if they would pose for you. Look for props that you can incorporate into these types of shoots. Practice, practice, practice.
Scout some good locations that will give you top shade. Use reflectors (cheap as chips on eBay) and make some diffusion screens to soften the light on a bright day.
As for pricing, NEVER sell yourself cheap. Right now I doubt whether you can compete at the top end of the market - nor could the current top end when they started out. The problem professionals have is that everyone has a digitial camera and everyone thinks they can be professional snappers. That's just a crock of you know what. Don't worry about Mr Cheap down the road. Mr Cheap will never afford new equipment to expand his capabilities. Mr Cheap will never get much better, he's found his comfort zone and earns enough - he isn't interested in becoming a better photographer. His focus is money. Let him have those who want cheap - they are the worst clients you can ever wish for (god that sounds so elitist, but it really isn't meant to).
I think you have got the potential to be a good photographer, but it takes time and investment. Shoot loads of tests for yourself. Step outside the box - break the rules. You'll be pleasantly surprised and it will give you an edge. To be a real pro, you need a style, something that says, "hey, that's Kat's work".
I hope that doesn't sound like a really long lecture, it's just a few thoughts after reading the thread. Good luck with your business, I hope you find success.
One more thing that crossed my mind. I wouldn't put images of my clients on a public file sharing site. I personally don't think it is professional. There are loads of great ways to get yourself online and put your clients work in secure password protected areas. Do you have permission to post them on a public site? We live in such a litigous world these days and you might find yourself in a lawsuit if you don't have written permission.
Cheers
Paul
EDIT: Kat, take a look
here. It's a piece of software that displays posing styles. You can download it and install it on your PC. There are about 200 different poses. Grab a friend who is of a larger body type and get her to try the poses you think will work. You don't have to shoot any images. Just get a feel for what flatters and what doesn't. Print off the pose pages and mark the ones you like. Use it as reference when you shoot. Before long it will come naturally and you'll find yourself referring to them less.