I completely agree with you, but it's very difficult to replace the 2.5" drive in recent iMacs, and Apples price for the SSD is unfortunately not $120.

In my opinion the base included option should be a reasonably sized M.2 SSD, with an option to increase the size of said M.2, or to add a 1TB (or larger) 2.5" drive as an extra if more storage is needed.

Replacing the HDD on an iMac is non-trivial. This is not only due to the fact that you have to unglue and then re-glue the screen, but there is also a non-standard thermal sensor on the Apple HDDs which you need to circumvent when putting a standard SSD in which doesn't have that sensor (if you don't, the iMacs fans will always spin at 100%).

It’s a desktop. Why replace the drive instead of just using an external drive? I could understand not wanting to lug around an external drive with a laptop.

And how exactly do you use an external drive? Due to the limitations of the internal drive, I have used quite a variety of external drives with my iMac, but no solution is really good and all are much inferior to an internal drive. USB 3 drives work the best, but are limited and speed as is the number of USB ports on the mac. Going via hubs is possible, but reduces the reliability of the connection, I keep getting drive disconnects. Also, I haven't really been able to find a reliable Thunderbolt 2 drive.

What’s wrong with the higher end TB2 SSD drives/enclosures?

Which ones? Can you list one, which doesn't disconnect from time to time without unmounting the file system? I used a thunderbolt enclosure from OCW and eventually the file systems were corrupted beyond repair.

I’ve never had that problem, using a Buffalo drive station mini (which I upgraded the 2 SSDs without issue either), neither with Akitito thunderbolt 3 4-bay thing. Both products are discontinued though. People complained about the Akitito one disconnecting on Amazon, from memory someone said the cable was a bit loose. I used an Apple thunderbolt cable from the beginning (because someone left out the included cable and it was coming from the US to NZ over Christmas...) and I dunno if that plays a part, but it’s snug and I’ve never had an issue.

I would not want to be booting off an external drive.