[ken]

It's true you can't offer things called "paid upgrades" or "demo versions", but with In-App Purchases, you can mostly get around this. For example, make your app free, and make some key feature an IAP -- that's basically a demo version. Or when you make a big new version, make the key new feature of the upgrade an IAP, so new users have to pay base+feature, while existing users only have to pay for that feature.

I happen to like these: I love being able to try something out before I buy, so "free + IAP" looks great to me. But there are a lot of people who must think that "free" means "everything free, for all time", and when they discover a core feature costs 99c, they go and leave a 1-star review. So you have to tread carefully.

Another option is to make a free demo version, and just dump it on your own webpage. It's not as discoverable as the App Store, but if people learn about your app and go looking, it's not too hard to find. A demo probably has minimal needs for the things the App Store provides (like licensing, purchasing, and updating), anyway.