I don't think that's a valid argument. Look at all the problems GM ran into when they had a zillion different makes and models. Just releasing more variations of the same thing doesn't equal larger sales; if it did, every company would be doing it. There's a certain level of sales the market will bear and it doesn't matter if you make 30 different models or 3.
The difference is that Apple only makes one size. Even if someone is absolutely in love with iOS, they may have an actual need for a larger screen (poor vision, larger hands, etc.) and for some people that may prevent them from getting an iPhone.
For almost every other product that they make, Apple offers a variety of different models. The most notable are their portable and iMac lines, where you can choose among different screen sizes. The only difference between iPhone models is internal storage.
Rumors have them moving to a larger screen size, which may help alleviate some of the problems that they're experiencing, but it's unlikely that they'll release two models of the iPhone with different screen sizes, opting instead of just use their older models to maintain the smaller screen size.
There are also a lot of rumors about Apple releasing a smaller iPad, which again shows that it's really difficult to completely dominate a market with only a single (I realize that there are six models of the iPad, but the only difference is internal storage, and cellular connectivity. However, limiting themselves to those being their only configuration options, precludes them from reaching certain market segments) model. The obviously recognize the important of having multiple offerings to cover as much of the market as possible, so the obvious question is why aren't they doing this with the iPhone?
My best guess is that they've been trying, but they haven't yet found a solution that allows them to make a larger device that they view as acceptable. Eventually they might hit on something that works, and we might see a larger variety (in terms of size) in the iPhone, but until they solve that, they're going to have to accept that they'll miss out on some sales.