Pricing a software product or service is one of the toughest tasks for any business. Particularly so in the web-centric world, where everything is expected to be free.
In this NBC TV show, Guest Gregg Rapp explains some interesting strategies that may help you design your pricing models based on how customer perceive price and the whole psychology behind it. The discussion (a restaurant menu) is not directly related to Software applications, but worth considering the essence of each strategy in pricing anything for that matter.
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On a related note, this podcast by 37signals on the same topic discusses how to price software applications.
Giving something away for free is fine as a step one as long as it leads to a step two where you charge for your product. Pick a price that seems fair to you and that you'd be willing to pay. If you're not willing to pay for your own product, don't expect anyone else to either. Also, your price tiers need to make sense relative to each other.
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