You have received excellent advice. Test I think would be essential . Small letters are best for babies/Lillian
Congratulations! As I have not done much of this size I can't comment, I just wanted to say how wonderful your news is.
Babash's and graceandham, certainly are on the right track. In my opionion their sizing is good, you don't want to overwhelm the garment. Test run is a good idea to get exactly what you want. Sandra.
I like Babash's idea. In general,my opinion, I don't go over 1" for a baby 0-1 year to wear. And 1.5" for 2-3 and maybe 4 year old. You don't want to overwhelm them!
What I would do is do a couple of tests on fabric the size you think might be right. Cut close to the lettering and lay it on the dress to see what you think.
I embroidered on a ribbed Henley for my nephew - a size 3t and the embroidery looked good on it. I used polymesh in the hoop and wss on top and after ironed soft cloud. I wouldn't put very large lettering on it. I like the ones that have a large initial and the others super imposed on it