Also take into account your own overhead costs: uploading fees, for example, and your tier/rent for your shop. You want to be making enough per sale that you don't have to make a couple thousand sales every week just to keep the roof over your head.
If the item you sell has copy permissions, bear in mind that when someone buys this object, they'll only be buying one of this object. So it may be prudent to price it higher than a non-copy item. This does not, however, apply to clothing. Clothing should always be copy anyway.
Speaking as a consumer: please don't call something "free" when it's not. One linden is not free. Ten lindens is not free. It's not that I mind paying that amount for an item; it's that there's a misrepresentation in being told something is free when it isn't.
Don't fall into the trap of offering your item at a cut rate, to undersell your competitors. As was mentioned by someone else before, if you price your item too low, it devalues the item itself. People expect cut-rate quality when they see a cut-rate price. And, like I said at the beginning, if you price your item too low you'll have to sell lots more of it just to make your ends meet.
If you decide your item is at least as good as the competition-- or if your item as yet has no competition-- and you charge a reasonably high price, be sure you tell the customer what it is that makes your item the better choice. Customers don't mind paying more, so long as they're confident that they're getting what they pay for.