Have you heard of decision fatigue? A diluted market with a focus on pandering, rather than making a story firsthand and leaving the target audience as a secondary priority, is basically that "too many marmalades to choose from" example. Except in this case, all the marmalades look so shit that people begin to wonder if they even like marmalade, and get a little ashamed to admit they do around other people.
Case in point, the anime industry has gone down a slope of pandering to straight male anime fans. The more fanservice they throw in, the more they alienate other groups and the more they drive parts of their target audience to insanity as they practically BEG producers to just cut the shit and animate good stories instead. The only ones who will still seriously be consuming it if it continues down this path are desperate loners that don't care about plot as long as they can see some tits jiggle.
This is not to say sexual content is bad, or that sexual content is pandering, or that only sexual pandering is bad. Sexual content can be good. Pandering rarely is, as something existing within a product in a way that suits the story isn't pandering but simply good writing.
When you make a good story firsthand and skip the pandering, making it attractive to more than just one target audience usually isn't that difficult. A good writer can easily do it, and a good director can easily give directives that help the rest of the team follow. Most of the time it doesn't cost so much more time or money as people make it out to be because time and money is NOT the problem. Creatives not wanting to do it is also not the problem. The problem is investors and mainstream producers being afraid it will scare away consumers because of some analytics that are caught in the very same feedbackloop that @liquidlilium described.
Thankfully, we live in a day and time where it's easier to publish independent content and rise as a small company in the entertainment industry. Basically, I think it's bs that mainstream companies rarely think outside the box and that their idea of making their content attractive to other groups or look less phobic is by adding random token characters (which is not representation, it's pandering. Whether it's attempted pandering to progressives, or pandering to people who don't want to feel guilty, varies). But can we force them not to? Nah. We can just call it bs and then try to produce something better. But we DO have every right to call it bs lol