The problem is that most projects make (possibly their only) hosting provider decision from a position of being unprofitable.
Thus when you segment the market by "people who can afford $20-100/month", you are also segmenting the market by the correlating variables "people who are mad at their current host" and "people who can spare several days to migrate their infrastructure".
As a member of that class who migrated to Linode, I can attest that the size of that market is nonzero. But I can also attest that a great many projects start and remain on AWS and lowendbox where the barrier to entry is much lower, and even as a satisfied Linode customer I continue to start and continue to maintain many projects in those environments.
This is one of those arguments that seems to makes sense when you're on the purchaser side of an SaaS product, but often breaks down when you're on the seller side.
One of the biggest costs of running a SaaS business is support. I'd guess that there's not a whole lot of difference for Linode in the cost of supporting a $10/month vs. $320/month box. In fact, there may be negative correlation -- I wouldn't be surprised if the cheaper customers are more expensive.
Now, your argument hinges on there being a high conversion rate from low-end plans to high-end plans. I'd guess that rate is quite low, in fact. Most accounts probably never upgrade and / or cancel after a few months. Now, the canceling in the first few months is a big problem as well, because for most SaaS businesses, your biggest support cost is going to be concentrated in those first months where the customer is getting set up. I wouldn't be surprised if it takes Linode a few months, on average (not median since support isn't evenly distributed), to get into the black on the low-end accounts.
The variables in that equation are really important in deciding if it's worth putting up with cheap, less knowledgable, high churn customers just in the hopes of upselling them over time, or if it's better to slice off the segment from the beginning that finds $20/month to be onerous.
The ongoing TCO of AWS is much higher than Linode, of course. But that's precisely my point: you want to capture customers at birth, incubate them into adulthood, and then charge them a lot of money now that they can afford it.
You also want to avoid scammers and fly by night operations that don't value your business other than to find cheap CPU and bandwidth. There is a set level of overhead for each new customer, and new customers are probably more likely to need additional support. The lower you go with pricing, the larger this portion of your costs eats into your profits.
There are $10 VPS solutions out there, but their poor reputations lends credence to the idea that $10 VPS solutions are not where the money is at.