There are 2 points we also have to consider when specifically talking about the custom development market, one is that advertising development houses are not helping the issue by putting out teaser ads like Get your iPhone app idea built for $5000. It sets pricetags in peoples minds that are unrealistic. When you get down to the fine print, if the app requires communicating to REST service or design work that numbers is out the door even with the advertiser.
The second being many times custom development shops don't weigh customer needs with COTS. For example in our shop we many times have customers that come in looking for a web presence. When we analyze their needs, it is apparent that Wordpress and a template will fit the bill and get them to market the quickest. I am not a huge fan of PHP on a personal level, but if Wordpress fits the bill I would be doing my client a disservice to not steer them down that path. I think for quite a few custom development shops everything looks like a custom development problem. I think if they would take the time to learn some of the cheaper solutions that will work for lower budget clients, then they can offer a product portfolio that matches the budgets of the client.
The latter is exactly what we regularly do. It's still a pain though, talking a client down from their original ideas (sometimes piles of paper with all kinds of ambitious features) to something that matches their needs within their budget.
Plus, these often turn out to be not particularly desirable clients that take up a lot of time, and there isn't sufficient margin on simple WordPress jobs to give such clients the same amount of attention as on major custom projects. It's very hard to make these clients happy with off-the-shelf solutions yet still make a bit of profit.
COTS helps, but it doesn't cover the gap between client expectations and reality. It's more of a "better-than-nothing" solution.
And don't even get me started on the cost of maintenance and upgrades. You don't want to have a few dozen outdated leaky WordPress sites in your portfolio, let alone a hacked site associated with your name.
For us, we have a guy that manages all of these type of contracts. It's kind of like an entrepreneur in the making kind of arrangement, for him. I agree on the hacking issue, which is why we personally don't host Wordpress sites and the person that handles Wordpress size clients makes it very clear that Wordpress provides the platform, security and all, that we provide the design, customization of template, SEO, analytical, etc.
While there are a lot of pain-in-the-rear small clients it is not unique to them nor are all of them pains. We have had a lot of small clients turn into large clients as well, we have had a lot of small clients refer us to large clients. How we personally made it worth while was to find a person that wanted to grow a company, but offered them the advantage of doing it from within a current company. This person is now, managing Wordpress (Drupal and a few others) for several shops like ours. He also receives a commission when one of his clients outgrows him and is ready to move into custom development. It has worked well for us, but it is by no means the bread and butter, but it does save a lot of time by not spending cycles with people that just flat out can't or won't spend the money to pay for custom software.
The second being many times custom development shops don't weigh customer needs with COTS. For example in our shop we many times have customers that come in looking for a web presence. When we analyze their needs, it is apparent that Wordpress and a template will fit the bill and get them to market the quickest. I am not a huge fan of PHP on a personal level, but if Wordpress fits the bill I would be doing my client a disservice to not steer them down that path. I think for quite a few custom development shops everything looks like a custom development problem. I think if they would take the time to learn some of the cheaper solutions that will work for lower budget clients, then they can offer a product portfolio that matches the budgets of the client.