In fact, if you find competitors in your market and they are using a free model to gain traction, don't be shy about taking them on with a paid model.
If customers find you first and you can close the deal, those other free competitors won't pose a threat. The caveat here is that you must keep your customers happy. However, if true customer satisfaction is just not quite attainable and you're in survival mode (due to being under resourced or what have you), simply keep the the level of pain that you create for them below the threshold of pain required to switch from your service to your competitors.