That's why you don't sell it as if you were marketing it to techies:

    (*) Choose a personalized email address, like john@smith.com, for $9.99/year.
    ( ) Choose a GMail address, like john.smith@gmail.com, for free.

They could handle the domain registration for the user, whether by being a registrar themselves, or partnering with another registrar behind the scenes. And yes, most people will still pick the free option. But that's ok.

I've had my own domain for a good 20 years now, and while I've encountered some confusion when giving it out, it's never been as bad as you describe, and people get it without my having to go into a technical explanation. And regardless, the reason there is this problem is because easy, seamless personal-domain options don't really exist. If they did, this problem would go away. I don't really consider this to be an obstacle.