The secret here is that you want to offer 'free shipping' to those customers that are hunting for a bargain and get the people who are concerned about quality, service, speed and/or security to pail full price or more for shipping.
The trouble is identifying the bargain hunters, from the value seekers, from the convience shoppers, from the security worriers.
THE GAP has done it VERY well with Old Navy vs Gap vs Bannana Republic -- same crap, same retailer, same mall, different prices.
Discerning this on the web is much more difficult, though very possible. I'd reveal the secret but the you wouldn't buy my new book, come to my session at the conference AND my boss would kick my a*s for revealing too many company secrets. He already hates that I participate in forums at all - he'd rather I just lurked and leached.
But the answer is there - Free Shipping works, but not for all shoppers or products. Find out where and who in your particular niche and you are a happy camper.