"Listen. Let's put one mid tier phone on the market. Make it expensive but not necessarily any better than its predecessor. Then, we also release a phone which is actually an improvement. Our flagship, if you will. The trick is in making the mid tier marginally cheaper than the flagship. This will make the step to the flagship a lot smaller and as the mid tier is basically its predecessor with a few tweaks and a new housing, the average Joe will not even complain. We are getting rid of the old iPhone fives, improving sales for the more expensive variant and it doesn't cost us a thing!"
Personal anecdote, but the 5c does feel amazing. A friend replaced his 5s with one and after using it a bit, I wish the 5s was in that case.
Over-simplified and off-the-cuff:
Many iPhone users seem to personally be on a 2 year cycle. Depreciation circa $300 / year.
Many others seem to be on a 3 year cycle, about as far as one can go before starting to really notice their handset lagging to the point of being unacceptable to them. Depreciation $200/year.
5c: Year old tech, in what for many will be "less pretigious" packaging, for $100 off the price of new tech in "more prestigious" packaging. You're immediately "out" $100, or $200, depending upon whether you are on the 3 year or the 2 year cycle.
$100/$600, for a savings of 17%. For 17% off, you're taking year old tech in a less prestigious package.
I would expect demand for the 5C to rise over time, particularly if the price differential between the 5C and 5S is widened.
It's interesting how the headline is spun though. Demand for iPhones isn't at all weak. In fact (as usual) overall it's much higher than analysts predictions. The surprise is that this demand is weighted towards the higher end product.
Add also that most consumers """"doesn't pay"""" the full price up front, instead they will pay the phone over a two years contract...
I would move the price band 100$ down for the 5C, just in the middle of the Samsung S3 and S4. Two birds, one shot.