Conor's got it dead on - free is not a bad word. Used carefully, it can get people who are on the fence to choose you as a provider, and / or it can be used to reward client loyalty. Just make sure that your business can absorb the cost - what good is having a massive sale or giving away lots of free products or services if it causes you to go out of business?
I've had best results as a business, and felt most confident as a consumer, when the "free" product or service is attached to another paid service - effectively, a discount. It looks most attractive to consumers if the free item is worth between 10% and 50% of the paid item - otherwise it either looks like a tchochke, or makes the consumer wonder how much the freebie is really worth (just like the OP's post suggested.)