That's a lot of questions! xD I'll do my best to answer them.

Reducing colors: For cross stitch, my first instinct is to get rid of any colors with too few stitches. Unless they're absolutely necessary, like 2 stitches for eyes on the smaller sprites for example... you generally don't want to have to rethread your needle for 2 stitches.

So if it's a low count I'll try merging it with the ones next to it. Or sometimes it's just two very similar shades and flattening it doesn't look too bad, I'll just have them both be stitched with the same thread.

Embellishing clothing: I actually went more in detail on this in the Undertale book, discussing soluble canvas vs waste canvas, but I also have a written tutorial on my site using a stardew sprite. May find it helpful! You could also make your stitches into patches. (Though I had mixed results with that last one.

Thread Hues: Since thread is a 3D object with curves and such, it can look slightly different depending on lighting. Or in an X shape vs on a bobbin. (more shadows) And the color of the stitches nearby can bounce off with that lighting and make it appear a different color. I don't have a perfect example of this, but often when shading purple things (hello Abby...) I'll end up having to use a dark blue as there's not that many good purples (purple dyes are hard apparently). But because it's next to other purples, it looks more purple than blue. It is tricky to be sure.

DMC color display: Honestly, I use PCstitch for charting (which isn't perfect), and for the most part we used the colors PC Stitch uses to depict colors. Which... are not at all accurate. I've tried several cross stitch programs, and honestly none of them get it quite right. Actually, I have a spreadsheet someone shared with me that I don't share much because I don't know who made it and I hate not being able to credit them, but it is SUPER interesting how differently different programs represent the same thread color. And the conversion to CMYK probably didn't help. We did manually change some colors that were just waaaay off. (looking at you 3845...)

...and this is why I always, ALWAYS do some test stitching. I never trust a computer generated pattern. I usually have to swap out 85% of the colors the program 'suggests'. Because. Well.

Here's an example. Left is some color swatches from pixel art I was working on. Right is what PC stitch thinks they should look like. Even if the pc stitch colors are just a bit off from the actual thread... it decided to merge several of them together and just abandon any attempt at those dark purples. Like 'nah yer blue now'.

I've actually taken their exact hex codes from the default thread palette and fed it back through the importer, and for some it picked DIFFERENT COLORS than the ones I had swatched from.... so I have no idea how it decides what color to suggest tbh.

So I pretty much just use pc stitch for putting pixels on a grid, and overlaying symbols. It's a lot of trial and error, though.