If the Bible is open to interpretation, how does one know which one is right? Often times when I cite a particularly egregious passage from the Bible in an argument with a Christian, they just shrug and say it's not meant be taken literally, that it's parable, or worse - that they don't follow it because they consider it outright wrong.

If scripture can have multiple, and possibly conflicting interpretations, how does one know which one is the right one? And why did this happen in the first place? ie: why does His word need to be interpreted?
You have asked at least three distinct questions in your question... I'm going to answer the one that I think is the most directly answerable, and hope that it satisfies the others as well.

Why does the Bible need to be interpreted?

Every written work must be interpreted.

When most people I know ask questions like this, what they're really asking is, "Why wasn't the Bible written in clear, easy-to-understand language, for someone living in my modern, Western culture to understand without any special effort?"

And when phrased that way, the answer becomes rather obvious:

The Bible was not written with modern, Western culture in mind.  Nor was any other ancient text, religious or otherwise.

In fact, neither was any of Mark Twain's work.

When we read any literature, we must consider the culture in which it was written, and the audience to whom it was written.

Further, we have to recognize the various genres of literature contained within the Bible.  It contains poetry, prose, letters, history, law, genealogies, and likely other categories I'm forgetting at the moment.  Each of these must be interpreted differently as well--and always with a mind toward the culture that wrote it, and the audience it was written to.