Barcelona have ramped up their interest in Coutinho over the last couple weeks and have seemingly identified the 25-year-old as a replacement for Neymar, who may leave the Camp Nou for Paris Saint-Germain in a deal worth almost £200m.
Liverpool have no interest in parting with Coutinho and have placed a £133.7m [€150m,$175.7m] price tag on their coveted playmaker in order to ward off Barcelona's evident interest.
Saunders, who enjoyed a brief spell at Liverpool in the early 1990s, believes his former side should allow Coutinho to leave Barcelona for a fee of £100m and replace him with Isco, who he believes will find game-time hard to come by under Zinedine Zidane next season.
The striker turned pundit also identified Manchester United's Juan Mata and Everton target Gylfi Sigurdsson as players who could replace Coutinho. A deal for Mata is unsurprisingly unlikely while Liverpool currently have no evident interest in Swansea City talisman Sigurdsson, who is eager to leave south Wales and become a part of Ronald Koeman's squad overhaul at Everton.
"£100million? sell him, [Coutinho]" Saunders told talkSPORT. "For me, he's replaceable. You could sign Isco for £30million. He's not going to get a game at Real Madrid.
"Juan Mata, Sigurdsson - there are players you could sign to replace Coutinho. "(Luis) Suarez was irreplaceable. Certain players are irreplaceable. I like Coutinho. The last game I watched he was brilliant but £100million? Once they knock the door as a player he's gone."
Saunders may have concerns regarding Isco's chances of game-time at Real Madrid, but the Spain international was afforded a fair amount of action by Zidane last season and even started Los Blancos' Champions League final victory over Juventus in June.
Isco only has one year remaining on his current contract in the Spanish capital but Liverpool are not currently pursuing the former Malaga star and are instead focusing on keeping Coutinho away from the clutches of Barcelona. The Reds have already rejected a £72m bid from the Blaugrana for Coutinho and are expected to bat away any further offers.