I don't see any problem in having multiple screen sizes. As I've said twice, Sony did the same thing and the only issue is that the Compact phones kept increasing in size, the latest being almost 5-inches, but I suppose as a percentage there's probably some correlation as other devices have gone to 5.1, 5.2, 5.3, 5.5, 5.7 and 6-inches.
Reduce the bezel and you can increase the screen size, and Apple still likes its bezels. I expect that will be the next step for the company - so the iPhone 7 and iPhone 7 plus will be smaller for the same screen size, or possibly (but I'd say unlikely) have even larger screens for the same size.
The iPhone 7 SE can then go two ways; reduce the phone size, which I think would make it too small, or up the screen size. Jony Ive might favour the former and have almost no battery at all, but common sense would say the latter - as that form factor seems pretty optimal.
Personally, I could never go back to such a small screen and I think Apple must know from its own research that a lot of people who ridiculed larger screens are now enjoying them, because they took baby steps and gradually went up a screen size with each update and have become used to the larger screens.
Of course, Apple users didn't have those small steps. They had small screens for years then a huge leap. Maybe people didn't take the leap because it was too big, and will stick with the SE. It doesn't necessarily mean people actually prefer a small screen, but are simply used to it.
I'm just not sure how big a market this is. In the long term, I'm sure Apple wants people to step up.