Yup, agreed. We're planning to provide domain vhosting (ie point the SRV for your domain to matrix.org and you'll get your own server instance) which should help a bit, although doing that for free could start to get uneconomic. We also need to work out a nice way to let users migrate between providers.
Free for "2 users per domain" might catch on for those of us who use our own domain for email/im. Not the most common thing in the world, but probably quite common amongst your potential early adopters. All while keeping away domains with hundreds of users that would cripple your servers.
I don't want to use the domain you provide, because I'm tied to a provider forever. I don't want to set up my server right now, because it's just too much work to try something that I may end up dumping (because nobody else I know uses it yet).
The overhead to get it is too high, when you're just betting it'll prosper.