They didn't have really poor sales - they got just enough to pay the expenses and actually get a minimum wage for the next year or so. But that was just the first month, it was a great success!

This was pretty much expected, with it spreading virally everywhere.

Well I have seen many comments from disgruntled developers that you can't charge more than a $1 for anything on the app store because that is what people expect to pay, so you end up with games made with a $1 price in mind. That's sort of my whole point, are we giving negative feedback on $20 indie titles and telling them we want them cheaper? If so, will that result in worse/shorter indie titles?

You can't apply the same logic to Indie development since their process is much more flexible, open and hasn't necesserely to comply with absolute deadlines like commercial titles.
Most will continue to code and work on the game as long as they can eat, drink and maybe even have an extra margin to live well enough with. You have to see from a less corporate angle, there are certain outcomes that couldn't be predicted concerning the available budget. They have several assets on their side: being Independant they fuel the sympathy of other gamers, the contact with the gamers is much greater and closer. You can turn this relationship into a financial source by doing community events and generally being transparent with your development schedule/process (see Overgrowth).
You can do some strange actions like the Humble Bundle or any other bizar deal which can make all the difference in the end. The work on the project goes on until they run out of money but you can be clever about it and turn the situation into a game.
The whole thing is really a game between the Indie devs and their fanbase/"customers".
People generally like games and feel they play a part in all this which in turns makes them stick around longer. ;)