Oren Nachman has clarified some of the confusion surrounding free applications on the Windows Phone 7 marketplace in his post WP7 Marketplace Tip #2.5 – Free App + Updates Policy Clarified (finally). Ok, so the upshot is that you have 5 submissions for free apps but unlimited paid apps. So you might be thinking…. but I have a ton of ideas that I want to build free apps (that make money via ads or subscriptions etc). The trick here is that Windows Phone 7 applications support trial mode.
As a developer it’s completely up to you as to what you do in trial mode – the typical things are to limit functionality or time limit the application. But if you’re creating an application that you want to be free, just submit it as a paid application with trial mode enabled (an option when you submit your “paid” application). Simply completely ignore this flag and just allow users to use the full functionality of your “free” application. Of course if users decide to pay you for the application then you’ll get that too (win win all around if you ask me, of except Microsoft who won’t make their 30% unless users purchase your application).