But I don't want to be either of those customers. It means the whole system has an extra layer of abstraction, so they can juggle VMs around. It's why you need slow EBS instead of just getting a flash drive in the same case as the CPU, with 0.01x the latency.
The key to scaling up is to have big-enough hardware on the backend. If Hetzner is renting out bare metal instances then they can only rent out the sizes that they have. If a cloud provider invests in really big single systems, they can offer fractions of those systems to multiple tenants, some of whom scale up to use the entire system, and some who don't. I think that is a win-win.
A fractional VM is also a fungible VM. If the tenant calls to spin up a certain size VM, then the backend can find suitable hardware for it from a menu of sizes. Smaller VMs can slot in anywhere there is room, not just on a designated bare-metal system.
A cloud provider is always going to want to maximize their rack space, wattage/heat, and resource usage. So they will invest in high-density systems at every chance. On the other hand, cloud tenants will have diverse needs, including some fraction of those big computers.