Marco, thanks for weighing in. As a user, it's difficult to realize that something that's billed as an "upgrade" isn't really one, in many ways. I don't feel like users should be put in the position of saying, "Oh crap! I shouldn't have hit the upgrade button!"
It would be great if developers who were going to reduce an application's feature set would rename the app before submitting it to the App Store so that it wouldn't come up as an update. However, I do understand the tough position you're in, given that your app has been wildly popular but hasn't delivered sufficient monetization.