It's been explained here
My guess is that they answered a series of questions that roughly follow the ones below.
1. What's the largest capacity iPhone we're going to make?
2. How many models (different capacities) should we offer?
3. What is the capacity of each model going to be?
1. Largest capacity phone
Apple supported 64GB capacity on their iPhone 4S back in 2011. Other competitors like Samsung already offer phones with 128GB+ capacity (via SD cards). With storage costs dropping quickly, Apple's last storage improvement being in 2011, and competitors beating them in storage increases, there was likely no question that Apple had to release a 128GB model to justify selling a "premium product".
2. Number of models
Robert Frost nicely pointed out that Apple loves to follow the rule of three. Not only is the rule an Apple tradition and a great communication technique, but it's also a powerful marketing tool. Selling fewer similar products makes buying decisions easier.
3. Capacity for each model
From (1) we decided that the largest model will be 128GB and from (3) we decided that there will be 3 models in total. We don't want to sell 8GB or smaller models since we passed that stage with the 5S. That leaves us with three combinations.
Combinations
A/ 32GB, 64GB, 128GB
B/ 16GB, 64GB, 128GB
C/ 16GB, 32GB, 128GB
Option (A) is the most straight forward. But now consider what happens with option (B) and (C). In option (B), the 64GB model is most attractive because it's 4X as good as the next level down. In option (C), the 128GB is most attractive because it's 4X as good as the next level down. Apple likely has higher margins on the bigger size models so they want to get customer to buy 64GB or 128GB versions. Going with (B) accomplishes this because it make the 16GB model look relatively worse.