When you should use Sub-domains
Subdomains are used when you have different products and services that you want to present by using a different website structure (Google does this for several products such as Adwords, Google Docs etc). Also they can be used for GEO targeting, or for increasing your results in SERPs. In many cases websites use subdomains because they use hosted blog services to power their blogs. Finally for dynamic multilanguage websites, subdomains are a great solution because they can be easily coded and they can achieve good SEO Results.
Examples:
specialproduct.example.com
blog.example.com
fr.example.com
When you should use Folders
The folders are the most common, easy to use and all purpose solution. It is the safest method in terms of SEO and Web Development. You should use folders when you have a relatively small website and when you want to maintain the authority of the domain in the main categories.
Examples:
www.example.com/product/
www.example.com/blog/
www.example.com/fr/
