You need to make the change in the iTunes preferences. It's under "importing" or something like that. You need to change the bitrate that songs are encoded at when they're imported. Understand that going below 128k is probably unacceptable as far as sound quality is concerned. The lower you go, the worse the song is going to sound. Sure, you can fit 2000 songs on your nano, but they'll sound like poo.
Butch