How much do coaches really affect the players' development and performance.  How much is a decent amount to target for coaches?  Is 12 million enough or should it be closer to 15 million?  How do people determine how much to spend on their coaches?

The amount needed depends on a few variables. How many of your coaches are willing to resign? Are there enough decent FI, HC and PC in the world pool that there won't be huge bidding wars for a few good ones? Is your ML team heavy on 25-30-yo players who won't decline or develop much regardless of coaching? Do you have a lot of high draft picks coming up to AA/AAA? The FI alone can mean a diffference of $3M+. The bug that has them ask for $750K if they'll re-sign means not having to spend $2.5M-$4M for a good one who will stay (it also can make it worth overspending this season with the likelihood of having a few $750K seasons after this season). If you have good AAA/AA coaches who will re-sign, your MiL cost will be low. If you have a ML PC and HC who will re-sign you won't have to get into bidding for those spots.

Total up the cost for the coaches who will re-sign and who are good enough that you want them to stay. Then look at a list of all the coaches for unfilled roles/levels and you'll get a good idea what replacements will cost. Where you need to be on the role/level scale depends on your roster makeup. If you have 21-22-yo players in key defensive positions, it's worth spending big to make sure you have a good FI and HC. If you have a bunch of 35-yo P, you want a good PC to limit decline (and want to max Training). I've gone as low as $8M and as high as $15M.

What do the bench coaches do?

Also, I had a 1B coach once resign but ask for something rediculous like $1.2 million. What's up with that?

Joshvkt is right; there are too many variables to give a straight answer. But I'll share my general strategy, and you can build on it or ignore as you see fit.

I like to budget $10 million for coaches, assuming I have a good fielding instructor who is willing to re-sign for $750K. $10 is enough to pay a good ML pitching and hitting coach $2-$2.5 apiece, and have entry left over to win a couple bidding wars for good minor league coaches. I never pay more than $600K for a ML bench coach. Just look at the available AA and AAA bench guys and offer the best one the ML job.

If you don't have a good FI, the cost rises. Check out the 4-5 highest paid FIs in your world and budget accordingly, but I usually like to have an extra $5 million, because those guys get expensive.

I see people spending 3 mil on a ML bench coach.  Wayyyy too much

As you can see, it's a matter of personal preference.   Some like to budget big and ensure they lock up the best coaches.  Others are willing to settle for slightly less than the best and save on budget.  People have won doing it both ways.  The market for Fielding Instructors is usually extremely competitive, so if your FI won't resign, probably a good idea to budget a bit more than you would otherwise.  May be a good idea to budget more than you think you'll need for the level of coaches you're comfortable with initially, and if it turns out to be too much, drop it the next season.   The exact impact on player development?  Unknown, better coaches will help, but you're not completely screwed if you have slightly less than the best; however, significantly below average coaches will stunt development, from what I've seen.