I think they shouldn't do it. I don't mean to sound like I don't want a cheap iPhone for the masses, and especially in the myriad countries which typically have a lower price expectation for these devices. I mean to say that if Apple wants to continue pushing the price points they typically push with their iPhones they need to push the envelope on the features and raw specs of their processors, etc. Imagine this, if people get a wind of what Android offers at their prices which are almost always cheaper than iPhones, no matter how small the gap, they would always gravitate toward the phones with the obscene megapixel counts and processor speeds. The only sticking power of Apple is the brand equity and the premium feel of their devices. Most sentiments I have gotten from iPhones are that there is a compromise on raw specs, which I find particularly interesting. It is akin to saying a slower car is what they'd want to race with, even if it was put up to go against a Ferrari.
Now I'd imagine that some people don't really desire the quad core processors of the Android flagships these days and yet go for iPhones because of the plentiful iOS ecosystem, but Apple shouldn't price their phones based on the namesake and build quality to compensate.
The iPhone 5c is actually a good first attempt at doing that, just like they could be said to be going for with the 3G and 3GS. It has a bigger battery, a phone comparable to just one generation below, and some awesome build quality for a polycarbonate phone. I would like to see them actually pushing further into that territory with a higher capacity of power available to match some of the flagships from Android in the coming year.