claus - 12:06 am on Mar 4, 2010 (gmt 0)
Just saw this now, so it's not that I didn't want to answer, just that there are so many pages on the www it's hard to catch up with them all :)
Personally I would make a 404 page with helpful links that point to the most related products. Perhaps even a line of nice sales copy to go with it.
The page would return a 404 code and not a 301, but there would be real live links to the other products and to the new domain root. It would be extra work, but in terms of converting customers I think it would be worth it.
For Google this would clear the invalid product URL from the index, and at the same time get the new products indexed, and for your visitors it would be helpful, and encourage a sale for a related product.
If you can't do this, I'd suggest making a 301 to the most similar product. However, if "most similar" is only as similar as "rocking chair" and "lamp" (both are for indoor use)... then I would just dump that link to a straight 404 regardless of the link juice loss, because the 301-benefit I would get from Google would not be able to compensate for the loss of sales due to totally confused visitors.
(ie. "if the site gives me a lamp when I ask for a rocking chair, why should I trust it with my money?")