The company I currently work for does something similar. Latest version costs money, previous version gets given away with hardware, and version before that is free.

However, we are going to transition to latest version costs money and two feature set reduced versions gets given with hardware and free.

Having 3 versions to support is too much overhead for a small company. And giving away old versions of our products with issues that we know we've solved gives a bad image of our software to new users we are trying to up-sell to the latest version.