The way I look at it is they had no idea what they (Joss, the writers, and actors) had on their hands. If you watch interviews (like the 25th anniversary show People.com did), they never imagined the show would become so loved and long-lived. The CW was new and had only put out B quality material at best. The show was called in to fill the second half of another show's season, which is why there were only 12 episodes. And, frankly, despite having some experience in the industry, Joss still had a lot to learn.

In other words, I think it was a function of world-building on the fly. True they could have kept him around, but Spike and Dru were up next (and Angel's arc), and they were far better than a vague big bad vampire like the Master, don't you think? Plus we got to see him return occasionally, like in "The Wish" or in Angel/Spike flashbacks. That was plenty for me, at least.