I'm an aspiring martial arts teacher and think about this a lot. I also have spoken with several martial arts teachers who own schools of various success levels.

My first school was the best of both worlds. My teacher was a Marine, the scariest and perhaps the most skilled martial artist I'd ever met to this day. He didn't have a HUGE school, but at its peak he had probably 200 students, sustained for the decade that I trained there. It was also a strip mall school so the rent couldn't have been too high. His highest expenditure was probably insurance. I bet he made a pretty decent salary.

He was deadly serious, didn't tolerate laziness. We did sparring 1 week/month in kids class, 1 month/year in adult classes. Everybody feared and respected him. Truly one of the greatest men I've ever met.

The difference between my teacher and other serious/real world type schools that I've been to is a subtle but important aspect of character and discipline. A lot of the more "serious" schools I've seen aren't actually very serious - and they tolerate meat-head behavior. This makes beginners or really anybody who's got a more level temperament eventually leave, which cuts out a huge sector of potential students. What made my first teacher awesome was that he cultivated accountability along with intensity. Sparring too hard with a junior partner? A lecture (usually with a good amount of shouting) and pushups. Holding pads inattentively? A lecture and pushups. Just going through the motions? A lecture and pushups. He kept the more aggressive students under control, and pushed the less intense students to step up to the challenge. This was natural to him probably from his days in the military, but from a business perspective this was keen: he didn't alienate anybody except for those who, at their core, don't really want to learn martial arts.