The systems that it needed to compete against had 16bit audio. Whether you think it's good enough is irrelevant when someone is comparing between two products based on their specification.
Audio bits are important but DAC's can be more so, 12bit with high quality DAC with 8-24 channels might be more cost effective and sound better than 16bit with cheap DACs, which was the scenario for the soundblasters at the time..
Fast ram makes a difference to performance, but not enough. It would have made a huge difference to the price.
This is the thing, I think price was something to be concerned with, but the A500 was initially £499, and the A1200 was £399. I would say that for £549.00 it would have still been bought at a configuration that put it in a better position technologically and therefore better overall value. A1200 was cheaper at release than A500 but yet sold a lot less. Given a £549 price target, or even £599, what could have been incorporated during design/manufacturing?
A1200 case:
1) make it fit 3.5" hard drives by design - no more overly expensive 2.5" Hard drives that delayed hard drive uptake, which eventually led to everyone shoehorning 3.5" drives in there anyway..
2) make the floppy drive enclosure a removable bay to enable the ability to swap out a CD Rom drive.
Motherboard/Chips etc..
1) IDE connector conveniently situated for above mentioned CD ROM
2) Allow external Floppy Disk connector to be switched to DF0 and boot.
3) CPU put on a daughter board that can be easily upgraded by user for use of incremental processor upgrades supplied by Commodore, from 7mhz 68000 (yes! see below) base config with options at time of purchase going up to 030 with FPU, then let the market figure out what it wants..
4) Two fast RAM slots with greatest capacity for price ratio - I would be sure how much supporting 256MB ram would add as opposed to, say, 16MB. With options at time of purchase for upgrades.
5) Upgrade serial port for faster transfer
6) Ethernet port.
7) 12bit audio with as many channels as costs allow.

Support for joysticks with 6 buttons as standard.
9) Chunky modes
10) RGB to SCART as standard and have modulator external, like A500, compatibility with it even better.
11) More sprites
12) With chunky mode, AKIKO can go bye bye, instead source 3D chip.
13) PMCIA - keep, but lower importance in cost/performance ratio than those above
A600:
Discontinued, machine totally cannibalized sales for A1200.
Instead: Offer 7mhz 680000 processor daughter card for A1200 without ram for cheapest end of the market, but still allowing for access to all upgrades.
Other things..
Software - Commodore securing licensed conversions of games/apps critical to market; ie: Wolfenstein, X-Wing, Cubase, Photoshop etc… It's worth reiterating that in the mid 90s, Amiga was using same processors and same clock rates as Apple Macs so the market was more open, thus seeing something like Photoshop on an Amiga wouldn't be as crazy as imagining it to happen nowadays.
Something like the above could have kept things going, with the possibility of 060 cards and possibly even the ability to upgrade the 3D chip, things could still be ticking quite nicely into the latter 90s for when the next major upgrade was to be released with PowerPC or whatever..