Terry, I remember years ago when my instructors went from a very strict, traditional teaching style to using positive reinforcement. I thought that they were selling out and that the high level of quality we had developed would suffer. I was very opposed to that change at the time. After a transition period, the quality actually went up. We were no longer driving people out of the school by our old methods and with greater retention, we were able to give greater value to more people.
The key I have found is to be a good finder. Look for what a student is (truly) doing right and then reinforce that. Most people will build a lot faster based on their successes than on their failures. You can and should keep your integrity, yu just need to be willing to learn and grow as a teacher yourself. Most people will see through the fluff and blowing smoke for what it is anyhow. But if you look for what parts they are doing right and build from that, they will make better progress overall. That is not being a sell out in my mind, that is giving greater value to your students.
As far as the intensity of your classes go, it is important to keep in mind the level of the class you are working with and keep that appropriate to said level. However, like another poster pointed out, there is much to be said for being known as the school with the highest intensity and the highest quality among your advanced students in the area. I like that being part of my school's niche. I just prefer to build strong black belts and their character rather than just eliminate the weak ones.
There is a school in the next town over that makes quite a bit more money than I do and one reason for their financial success is that they water down the requirements and never really push their students to really grow. They aren't THAT bad (it's not like they are ATA or anything), in fact they are probably around average among a typical USA school in intensity and quality. If we were to drop our standards to their levels, I feel that we would be doing similar levels business-wise. We do the business end as well as they do, but there really are a higher percentage of people who want to say they take martial arts or are a black belt than to grow into being one. OTOH, I still have great retention and make a very good living for my family and pay a good wage to my staff. And I really have a sense of accomplishment in the value I give and the quality of my black belts.
I would really suggest looking at trying the positive reinforcement methods of teaching. From my own experience, I can attest to the results. You can keep your integrity and the quailty of your school, but by changing some of your methods, you may find that you can give even greater value to a larger number of people. It may take some time and effort on your part and the transition won't always be smooth, but we master instructors need something to make us grow, too.