Well, first of all, know that you can't directly control how your players react. You can influence them to some degree, but it's up to them to decide how they react in and out of character. That said, it's good that your players are giving you some constructive feedback on their experiences with this. Keep that up as you try different strategies. Speaking of strategies, the most important one is knowing your pcs and the probabilities of how they will react to certain situations, how you expect different things to go down.
Here's what worked sometimes in my experience (in no particular order). No single strategy has worked for me all the time- no strategy is 100% (or even approaching it) effective.
1)build up your characters relationship with the villain before the direct confrontation. Give out clues and start exposing them to the back-story indirectly before the first throw-down. This can give them some context for understanding the villain’s context, whatever it may be.
2) Give your characters some way to identify with empathize with the villain. It may be giving him some degree of sympathy (like an extremist with good intentions). It may be some sort of past relationship with the PCs (blood kinship, for example). It may even be a common, greater foe that unites the antagonist with the heroes (if perhaps briefly). Just be careful to not overuse this one; it’s perhaps the easiest one to abuse (especially with former loved ones and associates turning bad- this can make your players paranoid).
3) Reward your players for letting a baddie live. Give full XP and some sort of treasure to compensate for the antagonist’s gear if they can’t loot his body (directly rewarded by other npcs for bringing the baddie intact, for example). If a villain is left alive, sometimes allow that to make for a positive change- perhaps with time the villain can be redeemed or at least become a useful resource against a common foe. Make the players have more use for keeping the bad guy alive for now than killing him.
4) Give your players other objectives other than simply killing the baddie. Make them have a choice- between personal vengeance and saving the village, for example. Again, this can get rail-roady if it’s done too heavy handedly.
Here’s an example of something along these lines that happened in a 3e Oriental Adventures game. This is something I hadn’t really expected, but upon reflection most of the elements of NPC “endearment” happened here. This involved a pretty despicable blood-magic using, tainted lich. First of all, he didn’t start off in direct conflict with the PCs. His initial contact with the PCs was just some cloaked weirdo who would approach them and ask some questions, going as quickly as he came (strategy #1).
Later on after the PCs had done some secret investigations into the dark side of the Empire, they learned of his somewhat tragic origins at the hands of the Empire’s secret researchers on blood magic and immortality. He was coerced into becoming their test subject, the choice: do it or see them use his sister instead. After things went awry, he became equally hateful of the tainted lands and the Empire itself. This provided some back-story and explanation for his actions- revealed not through villainous monologues but various second hand sources and conversations he had with the PCs over time.
The villain’s hatred of taint and the shadowlands also gave him a common enemy with the PCs (strategy #2). This was the villainous Seven Chosen of a dormant tainted god- seven villains doing more damage than the blood mage lich. Luckily, the PCs eventually convinced him to go after the seven chosen first.
Another interesting plot twist I threw in was that the lich eventually came to think that one of the female PCs was a reincarnation of his sister (again #2- the kinship thing). Surprisingly enough, for reasons I don’t entirely understand, the player of the particular PC (and maybe the rest of the group) returned a feeling of sympathy, albeit somewhat ambiguously. Several of the PCs themselves had had stints of darkness and experiences of reincarnation, so perhaps this was an element? Regardless, there arose from the uneasy peace a sort of kinship between the lich and the party through this character development.
Although the lich and the party conflicted with each other several times, there were always greater threats (the corruption within the Empire, the Seven Chosen, etc, strategy #4). Through their continued interactions with the blood mage lich, they were occasionally able to make use of his resources (strategy #3).
Over time, they began to affect the blood mage’s character (a more subtle #3). One time they scryed on a meeting of him and some of his allies. When they heard him turn against them and said that “Sometimes there are more important goals than revenge,” I was astonished to hear the players cheered as he said this.