I don’t think your point of view is unusual, but do disagree that starting a business as a low-cost alternative has only one direction it can go. In transport we’ve seen a boon of low-cost airlines. In fitness, low-cost gyms. And here in the UK some of the biggest success stories have been the low-cost fashion chains and supermarkets.
Low cost doesn’t have to mean dirt cheap, however. I believe it is understanding more about how you can offer much (if not all) of the value as your higher priced competitors, without the expensive frills, at a much more attractive price point.
In airlines this means getting rid of baggage options. In gyms you lose the swimming pools and manned receptions. And in the case of SaaS, you lose the dedicated account managers and bulked features, that many customers do not need.