By figuring out who your intended audience is, it can dramatically change the time, materials, tools and people needed which of course translates to money saved. Once you figure out who you are building a prototype for then you are better able to understand what functionalities you want to convey. Once it is understood what is to be conveyed and to whom, then it is easier to pick the tools needed to convey the necessary information to the intended audience. One group may only require that the prototype be expressed with pencil and paper, another may respond better to digital prototyping in the form of a simple PowerPoint or as advanced as a WYSIWYG or HTML format for something that looks a little more finished.
Prototypes are important in allowing testing on the design along with how it functions before investing time and money into production. Can help identify issues as well as identify successes in the product based on the user experience. If it is mostly a success then a project can move forward with a few changes, however if there are a lot of issues then you may have to go back to the designing board and start all over again.