Yeah the sequel/alternate reality thing that draw on every other piece of media from FF7 universe was just SE shooting themselves pointlessly in the feet, multiple time (although it hard to say if that's really the cause of low sale).
Let look at it this way, there's potentially four type of audience members:
1-People who played FF7, followed every/most piece of FF7 media that came after, and loved it most/all.
2-People who played FF7, followed every/most piece of FF7 media that came after, and mostly disliked it (I'm here).
3-People who played FF7 but didn't really touch anything since.
4-People who haven't played FF7 (by far the biggest segment).
Making the game a sequel/alternate reality literally only please the first group of people, every other group either doesn't care or find that a negative, crucially that include 4. On the other hand, making it either a straight remake would please 1, 2, 3 and not bother 4 and really changing the game story (without drawing on any other piece of media) would have been positive or at least neutral (1 would like it, 2/3 could go either way and 4 would be neutral).
(You could say there's an extra group who played FF7 and didn't like it, but those probably wouldn't play the remake or at least not care about it being a sequel/alternate reality and would probably prefer a major story change).
Maybe the Nibehleim flashback should have at least been included in remake so that there would be an hook for newer player to keep playing the trilogy. From their point of view, remake ends in a really awkward spot. The fate creature things are killed (although its not clear why they had to be), Shinra seems ineffectual (president was just killed, they're blowing up their own reactor better than avalanche could ever hope too and anyway you just left their headquarter) and Sephiroth isn't really doing anything evil, has already been defeated and seems to just want to cooperate with Cloud anyway.