I've had a very similar experience. I had my nipple reconstruction on 29 June, and was thrilled with the new nipple. I was warned that it would shrink quite a bit, which was fine as it was initially bigger than my other one. I had my first tattoo session in mid August, and my new nipple halved in size within a couple of days of having the tattoo. But it hadn't shrunk any more when I saw the plastic surgeon ten days ago and I assumed that it was at its final size - it was still small, but still looked like a nipple. The colour the tattooist used the first time was quite pale, and faded a lot, to the point where my breast surgeon didn't realise I'd had it done when I saw him last week.
I had the second tattoo session on Wednesday, and a much darker pigment was used. Everything seemed fine until I got up yesterday morning, and my lovely new nipple has now disappeared and is completely flat. I'm so upset, and can't help feeling that the shrinkage must be due to the tattooing. I'm sure I remember reading that the tattoo ink could cause shrinkage, but the plastic surgeon said she had never heard of this. Fortunately she said that she would be happy to re-do my nipple if it flattened any more, and as I'm due to have a bit more liposuction to my new breast in the next 2 or 3 months, I'm hoping that she can do this at the same time.
As far as the fading is concerned, the tattooist said that most women need at least two sessions, and she has me booked in for another one in January, but in view of what's happened, I don't want tattooing done again!