Some ISVs use no-cost products or open source strategies quite effectively. For example, SleepyCat is a very successful small ISV that developed its own software. At SleepyCat, they use an open source strategy. Their product is wildly popular.
However, it's easy to forget just how expensive it is to build software. The ideal loss leader is something that is quite cheap. Although the cost of goods on software can be zero, software development is really expensive. If you are building a piece of software for the specific purpose of giving it away, you are accumulating a lot of costs that need to be repaid in some other way.
The way Nemein works is that we sell and contribute to existing Open Source projects. The initial cost of building the application has already been carried by somebody else, like in the case of Aegir by Hong Kong Linux Center and in case of MidCOM by Link-M.
Our clients get the application itself for free, and only pay for deployment, training and support. If modifications or improvements are needed we will either do them ourselves or outsource the work to one of our Midgard partners. In these cases the client will pay normally for the project.
Even OpenPSA, which was built from ground-up by Nemein has been mostly project-financed. One client paid for the first CRM version, one for the Project Tracker, one for the Group Calendar, etc. And since then smaller improvements have almost always been financed by some deployment project.