Where you spend your money
The issue with prize purse vs appearance fee is that races probably get much more value out of appearance fees.
If the money just goes into prizes then it will mostly likely just go to anonymous foreign runners who show up, take their money and leave. If they even speak adequate English (often not the case), they won't do press, appear at schools, expos, etc. and can't or won't connect with most of the other runners or the public. There's just not much value to the race in having some nomadic C-level Kenyans and Ethiopians winning prize money. That's less true if you can get top names, people like Wes Korir who make an effort with the public, etc., but that usually only applies to top level races.
But with appearance fees, they go to runners that the race knows it will get some value from because part of the deal can be that they talk in schools, do easy runs with regular runners, sign autographs, etc., and they can be Americans or at least runners that the race management thinks will connect better with the public and back-of-the-pack runners.