Chris Anderson has written an excellent article, Free! Why $0.00 is the Future of Business. Go read it. Send it to anyone who is having a hard time understanding how you can make money off of free stuff.   

He starts with the Gilette razor example, "give away razors, sell razor blades" and walks us through how that model has evolved to Google and Flickr and others.

Give a product away and it can go viral. Charge a single cent for it and you're in an entirely different business, one of clawing and scratching for every customer. The psychology of "free" is powerful indeed, as any marketer will tell you.

Some of the business models he describes for free products and services are:

• "Freemium". Sell a pro version like FlickrPro versus Flickr.  1% of the users support the other 99% and this is possible because supporting 99% is really cheap with digital technology on the web.
•  Advertising. Sell two things: ads and placement in search results. This is the "third party" model. A third party (the advertiser) is paying to participate in the free relationship between the service provider and the users.
• Cross-subsidies. Giving away something to sell something else. For example, giving away CDs to sell concert tickets.
• Labor exchange. This is Tim O'Reilly's architecture of participation idea. You rate books on Amazon (provide a service) and get recommendations.
• Gift economy. He lumps wikipedia and open source software into this category which I think is a bit of a cop-out. This category could be flushed out in to multiple more categories. 

I copied a bunch of quotes, but two points that I think sum up a lot of it are: 

First, a free lunch doesn't necessarily mean the food is being given away or that you'll pay for it later — it could just mean someone else is picking up the tab.

Second, in the digital realm, as we've seen, the main feedstocks of the information economy — storage, processing power, and bandwidth — are getting cheaper by the day. Two of the main scarcity functions of traditional economics — the marginal costs of manufacturing and distribution — are rushing headlong to zip. It's as if the restaurant suddenly didn't have to pay any food or labor costs for that lunch.

He alluded that businesses should give away things for free, focus on getting reputation and user attention, and then figure out their business model. Personally, I think businesses should have at least an idea of what their business model is, but they definitely need to understand that their product is not the most valuable commodity anymore. Reputation, mind share, respect, user attention, are all much more valuable these days.

As costs go to zero, the value you can offer to users goes to infinity.  One of the reasons we have made our knowledge base free.