The Wall Street Journal published an interesting article today on The Economics of Giving It Away. The article describes how, in the past, web startups would use an advertising based revenue model and give away their product/service increasing the size of their audience until they were acquired by a bricks and mortar company willing to pay out the cash for mind-share at a premium. The global recession has changed the efficacy of that game where VC, advertising, and acquisition money has pretty much dried up.
Since the classic exit strategy is no longer available, new ventures need to generate revenue in other ways. It's not as simple as charge for the service for two reasons; the culture of the web now has a tradition of free services so people are hesitant to pay there and people have less discretionary money to spend.
So, what's an entrepreneur to do? The author suggests going the so-called freemium route where you build your network with a free service but allow users to upgrade to a premium service which gives them access to more features. First time and casual users are not likely to pay for your service but passionate users are. You continue to build social capital with the free version but also build economic capital with the premium version.