Matt Cutts from Google posted another great video on the Google Webmasters YouTube channel today. If you are not following this channel on YouTube like a hawk, you really should be. It is one of the few places where you can get information straight from Google related to SEO.
In today’s video he discusses how an eCommerce site should handle pages for products that are no longer going to be available for purchase. His advice for the smaller company I think is spot on, however, his advice for the medium company I think might be a little flawed. Any online retailer that gives a damn about the quality of their product pages spends more time and energy on creating those pages. This in turn becomes a sizable investment for the retailer. This page inevitably gets indexed by Google and generates traffic for the retailer. To just give up on that page seems flawed to me (not to mention that letting a customer land on a 404 page is far from a good experience).
What I would recommend that you do is go with the advice Matt gave for the smaller website. Provide the customer with a good replacement item for the product and let the user move on to that product. I bet you’ll see more conversions for a page that recommends a replacement for a discontinued product than a 404 page.
Anyways, check out the video and decide for yourself. Let me know what you think in the comments.