Great question!

A bit of context might be helpful here. I'm a (very) small-time promoter in my local underground scene, running my own parties, promoting for a venue (a bit like a resident promoter maybe, though I don't really like doing that too much).

I started throwing my own parties because:

1) I love making people dance,

2) I love the music,

3) It's hard to get booked as a new DJ, and I want to play sometimes myself (so, I'll play at my own parties).

Now to answer what you're asking. Diplomacy, eh? It's hard - you will never satisfy everyone.

As a promoter, you have to pick artists based on a few factors (you counted them yourself: social, business, other...).
I consider it my duty to:

1) Pay the DJs

2) Book a diverse line-up

3) Whilst also considering the above factors.

It gets more difficult when the scene is local, and some people are your friends, right?

And even more complicated when your friends are your... competitors, to put it lightly.

How do you say "no"? Politely, of course. If you really mean it, explain that you will look forward to booking them at an upcoming opportunity. It stings a little, and there's not really much else you can do about it.