Free Ebooks boost Sales, but How?

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Victoria found this interesting Fact about giving away a free eBook of your novel.

... a doctoral student, John Hilton, is collecting data on the sales impact of ebook giveaways...

...While four of the five Random House books Hilton identified showed an uptick in sales post-e-version, 20 of 24 Tor titles showed a decrease. Why the difference? "One possible explanation is that by making the free books available for only one week a different dynamic was present [for Tor] than when the books were made permanently available [by Random House]," Hilton says. "The opportunity for word-of-mouth to spread about the free book may have been significantly diminished in the model used by Tor (Writer Beware Blogs!)."

Permanently Free= Word of Mouth

The study is finished but the difference between permanently giving away a free eBook increases sales while a limited time free eBook didn't.  The trick to building any audience or community is word of mouth.  My question is, how much do you giveaway?  I am not talking about whether or not to give away the whole book or just a sample, I am more interested in when is a good time to start giving away the book.

Writing in public

I have been toying around with the idea of writing a book in public.  I am in the process of developing a new novel, and I have been thinking about making the development and the writing public.  The question for me is how.  I can see a couple options:

1. Set up a free blog and allow anyone to read and comment on the ideas, outlines and drafts.

2. Set up a paid blog and allow anyone who preorders the book to read and comment on the ideas, outlines and drafts.

I like the second model best because it would weed out people who do not like my work at all, and it would allow my fans to be a part of the the writing process.  I do not usually release hardcovers, so maybe I could make a signed hard cover the preorder book.  Maybe I could even set up a gold membership that would offer an exclusive copy of the prewriting in print too.

What do you think?