The key thing about Baen's attitude is that they are focussed on two things:
- promoting authors, rather than individual books
- building their base of happy, satisfied customers.
Both of these concepts lead them to focus on getting you to buy the next
book. Whether that's the next book in this series, or the next book from this author, or the next book from Baen.
If you know and like a series, you're more likely to buy the next book. Having all the Honor Harrington books available for free lowers your cost of entry to the series -- you don't have to purchase (or find, or borrow, or...) 10+ previous books. Similarly, if you know and like an author, you're much more likely to purchase their next book in some format or other. And that means more $$ for Baen. Finally, happy satisfied customers come back again and again. They tell their friends that Baen is the good guys. They tell them "Yeah, their rep is for exploding spaceships, but there's also a ton of mysteries/fantasy/reissues of good old stuff/whatever." All of that builds future sales. Which seems to be working far better for them than trying to focus on squeezing the absolute most out of "this book, today."
Overall, this strategy has taken them from a mostly-paperback house, to one with plenty of hardcover releases many of which hit the NYT bestsellers list. That's "many" in a relative sense, as in "a few -- three to five -- bestsellers each year," which is well over 4%. No larger house matches that hit rate on the bestseller lists (it would probably be impossible for them to do so). And Baen's sell-through is over 70%. And, they aren't afraid to reprint when sales warrant it: for example Monster Hunter International
did vastly better than expected after a slow start; it's had three printings now (or is it 4? 5? I'm not sure), each larger than the previous. MHI won't hit the bestsellers list, because the sales are distributed over many months, but it's outsold a fair number of NYT paperback bestsellers.
As pointed out by various earlier posters, Baen can work this way because they've chosen to be extremely low overhead, because they maintain their focus on what they do well, and because they are a private company whose owners allow them to take a long view. None of these attributes apply to the Big Publishing Houses.
P.S. I'm not an insider at Baen, I just read their web-boards and pay attention to statements by the Publisher and her minions.