I think the problem may be that it is so horrendously expensive to make a CD using the normal methods, it is necessary to charge at least ten or more pounds even to get your money back. Hence if your downloader can get the music for less than that or nowt, there are those who will do it no matter what.
One solution is to produce your CD's to professional quality yourself.
By that I mean recording printing duplicating the lot.
If you are able to do this you can lower your prices accordingly, and make it worthwhile for (some) potential downloaders to buy a CD at £5-00 on a gig. I'm not holding this up as a one size fits all solution, but it may be worth considering. The big hurdle is the printing however a mid priced laser printer for black and white printing (the notes to your songs), a good quality inkjet for the colour covers and printing on the CD (using compatible ink) and a cover design system like 'Audiolabel' and you're there. Works for me.