Look at it from a German or European point of view. Here we don't have the huge distances of the US. About the longest vacation trip, like from Germany to southern Italy, is only about 1,000 km = 621 miles. I just did such a trip, altogether some 2,500 km to, around, and fro, in October with my Model 3 SR+ and didn't think that my battery was too small. Sure, it did take me about an hour longer than in a Diesel car under normal assumptions and maybe a half hour longer than in a long-range Tesla, but that honestly didn't matter.
I doubt that somebody from northern Germany would drive to southern Italy in one day, so that still doesn't require a longer range.
People in the cramped, partly medieval city streets value shorter cars because of parking. They generally make do with smaller cars. Many people cannot afford a Model 3, so a somewhat lower price would enlarge the potential market quite a bit. Add to this that the fixed-size government subsidy for new electric cars has a proportionally bigger effect on lower-priced cars.
If Tesla understood this, and I think they do, they could aim for a smaller, lower-priced hatchback for the best combination of four to five seats, a still large cargo volume with the rear seats folded forward, and easy loading on a flat surface with the rear door up in the air. A range similar to the SR+ could be ideal, but they could also add a long-range version if they wanted to.
