Blind Horse Knives is pretty much doing just that--small necker sized knives, basic designs and grinds, machine finish, recycled steel (some sort of concrete saw, I believe), for around $65.
Finding your "place in the market" is really good advice. It's easy to think of terms of PRICE=MATERIALS + LABOR. When it comes down to it, more realistically PRICE=MATERIALS + DESIGN + NAME RECOGNITION + LABOR.
You could have excellent fit & finish, top notch materials, but have a design so off the wall that it doesn't sell well. You could also have a design that's been over-done, that it's difficult for your knives to stand out in the field.
The thing that stands out in your post is that you already feel that a Kydex sheath wouldn't do the knife justice. Would you be happy selling the package that way? Yes, you could make a sale because your price point is lower. Do you think the customer would be just as happy with a Kydex sheath? If you're unhappy with it, and think that the package would be better with a leather sheath, do you think customer satisfaction would be greater as well?
I guess what I'm trying to say is, you could get a customer, but would you get a customer that would come back to you in the future because of how happy they were with the knife/sheath they acquired from you?