It' about personal preference and how you carry your device. I usually carry it in my pocket without protective covers or anything that makes it bulkier and it's much more comfortable and easy if it's thinner. If it has huge screen, it's annoying to use with one hand and not that practical in car either. If it has both huge screen and considerable thickness, it's not practical any more for me.

You are right that squeezing everything in smaller and thinner frame is harder, but it can be done and end result is really good if done correctly - don't you find it amusing that iPhone 6S has smaller battery than most of it's android rivals, but still it outperforms them in both battery life AND raw performance? Not to mention camera performance which is also good despite the thin design. Of course, it's harder to do if you try to sell cheap and still make a margin.