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.