When considering that the previous models are pretty much the same product, you have to leverage the incremental improvements in hardware to the price (both upfront costs and committing to a new contract). From a hardware standpoint it comes down to: faster speed, better camera, and improved battery life.
Their battery life claims are not insignificant - they advertise improvements of 20% for iPod functions and up to 50% increase for WiFi browsing! So when it performs as well as or worse than your previous iPhone, yeah, it's a bit of a kick to the nuts.