I totally understand "premium small cars" like an Audi - they're only small in size, but rich on features and driving experience. Then we have small cars that are meant to minimize operating costs. One of the keys to this minimizing of costs is not just in a low fuel bill, but in the upfront cost and depreciation.
The Smart is not a Mercedes A or B or anything like it. The driving experience is economical - barely. I'm not sure about the gas versions, but the diesel versions were horrible in terms of reliability and build quality was bottom of the heap.
So, what are you paying for? Features? Well, hate to break it to MB, but the economy class cars are now bursting at the seams with features. Economy? Once again, despite it's small size, fuel economy is not outstanding. Many larger more practical cars achieve the same or even better. Economy of operation? The high purchase price and terrible depreciation add a lot to the long term costs. Add in niche dealers and low volume parts prices and your costs are quite high. Driving experience? Pretty much every car around save perhaps the Mirage hands down beats it in that regard.
What are people paying for? The "look at me" factor. That's it.