I respectfully dissent from Armfoot's answer as to usage and I'd like to also address the "why?", which is after all the title of the question.
First we need to distinguish two usages: (1) "vós" referring to a single person and (2) to a multiple persons.
In the first case, "vós" used to be used as a deferential or formal treatment (more on that later). That usage is all but dead, remaining mostly in:
- period dramatizations,
- to address God ("Pai nosso que estais no céu...").
As a plural, however, the situation is different. In particular, vós is not formal when addressing multiple persons. In fact, the opposite is true, it's more informal than using the 3rd person in the few regions of Portugal where it's still used. For instance, Conde provides the following paradigm for the regional Portuguese from Trás-os-montes and Beiras (simplified):
informal formal very formal
2nd sing tu você o senhor
2nd plural vós vocês os senhores
Here is an example from CETEMPúblico, which is clearly not formal:
«Ganhastes, mas a jogar assim ides mas é p'ra II Divisão»
Note that the paradigm for standard European Portuguese (that is, the one spoken by educated people from the capital) uses "vocês" for informal treatment (which, by the way, is not as dangerous as the singular "você"). I lived in Lisbon until I was 25 and, outside of classrooms, set phrases like "Falai no mau que ele aparece" or impersonations of Diácono Remédios, the first time I actually heard the 2nd person plural declinations was already in college, from a colleague who had come to study in Lisbon from the northern hinterland (in 2002).
In the regions where it's not commonly used, it still doesn't sound formal. No one in their right mind would use it in a formal letter.
It sounds at best, poetic or of a solemn style, or, at worst, provincial. In this sense, it is similar to the poetic or rhetorical use of tu. As a maxim, in Portugal people would say:
Não faças aos outros o que não que queres que te façam a ti.
Even to someone they wouldn't address with tu. Likewise:
Não vades pedir ao lavrador quebrado de trabalho os ratinhados das suas economias para regalos da capital...
is not an order to the interlocutors, but rather a general statement.
And if you present a speech to an audience and you use "vós" (like Pinto da Costa does), you're not making the speech more formal (for that you would use "os senhores" or "Vossas Excelências"). You're either making it more informal/popular sounding (especially if the audience is from the North of Portugal and has had some contact with the form) or closer to a sermon (otherwise).
On the Diachronic Aspect
The process has to be seen in the context of the highly stratified societies of the past centuries. Here, each of the upper social layers (starting with the king and the court), then the nobility and the bourgeoisie demanded distinct forms of treatment. These would then be adopted by the lower classes, to the point where new forms had to be invented to distinguish them again from the lower classes. This is a process not much unlike what is seen today with names, which go down the social ladder until they stop being used altogether.
To get into specifics, this is the timeline described in this article by Lopes and Duarte:
Up until the end of the 14th century, the system was similar to that of the French:
Cintra (1972) shows that the current system of address differs from that found in the inchoate stages of the language, where there were no forms of nominal type – or at least they can't be found in texts. The opposition was established essentially between tu/vós (intimate form of address) and vós (form of courtesy or distance), like until this day in French.
According to the same article, in 1460, "Vossa mercê" shows up as form of address to the King and stops being so in 1490. I trickles down the social ladder to the nobility and, by 16th century, Gil Vicente uses it for the bourgeoisie. "Vossa Senhoria" goes through a similar process, starting with the king and passing down to the nobility, but stays at a higher level than "Vossa mercê".
By 1597, the king Filipe II establishes in law the forms of treatment that should be used. You can find the law here, page 197 (Google Books numbering) or 287 (own text's numbering). Note that this law limits the use of "Vossa Excelência" to the duke of Bragança and to legitimate sons and daughters of infantes, "Vossa Senhoria" to members of the nobily and to top public servants. It does not regulate the usage of "Vossa mercê", which was already widespread.
With these competing forms, in the 16th century "vós" had already started its path to obsolescence. The article goes on analyzing plays and this process appears to have been already completed in the first half of the 19th century (maybe a bit earlier in Brazil).
The trajectory of the plural seems to be similar, though the article points out a faster grammaticalization of "vocês".