Selling a new small phone is a market problem for Apple.
The form factor inherently makes it less expensive to manufacture. Bigger screens cost more etc. Which creates a pricing problem for them.
If they price it like a small phone (i.e. lower price) they cannibalize sales of larger phones with higher total margins, and lose money. If they price it with the same total margin as the larger phones, it'd still be the lowest priced current generation phone in their lineup, but would then compare very poorly on price to similar spec Android phones, which makes their brand look overpriced (as opposed to premium).
About the only way it would make sense is to make it a premium product. Give it the fastest available processor etc. so it can justify a premium price despite the size. But that's a difficult engineering problem. A faster processor uses more power and generates more heat, but smaller phones have less room for a big battery and less surface area to dissipate heat. And finding a solution for that is extra hard because what it needs is an advantage relative to larger phones, but if you improve performance per watt or battery density in general then the same improvement can go into the larger phone too and you still have no relative advantage.