Did you enter races at local swim meets, even if you knew you weren't going to race anywhere beyond the local level?
Are you familiar with all the different competition formats that are available to kids who skate in the US these days?
Learn to Skate competitions (skaters who skate less often may stay at these levels for years)
Test Track events up to senior level (although they tend to be more popular at lower levels)
Spin events
Jump events
Compulsory moves events (sort of like less-formal short programs for juvenile level and below; like the spin and jump events, they're performed on half ice without music)
Light entertainment/Dramatic entertainment/Showcase events
Solo dance
Interpretive events
etc.
Also Synchronized Skating and Theatre on Ice for skaters interested in team skating/camaraderie.
Some of those are more about skill development for lower-level skaters who may have set their sights on competing at higher-level standard track events as they continue in the sport, especially true of those who start young. Some are alternative events that attract skaters who may be more interested in the artistic aspects of skating or in on-ice skills than in jumping.
Some of those disciplines do have serious competitive structures and do attract some skaters who are interested in being the best and winning medals.
Others are really just for fun.
Some skaters train and compete in multiple different disciplines, including standard-track freestyle. Others do only serious events; others only more relaxed events.
Seems to me like with FS, it is at the back of everyone's mind that they are going to be an elite skater but for spending yet more money in training. The parents spend more and more money for the child to keep passing levels when, in reality, they are never going to be elite skaters.
It really depends on the family. Some kids really want to achieve the highest skill level and results possible and their families are able to support that desire. Some parents really want their kids to be champion skaters and push them to train hard and aim for competitive success.
But at any given local rink/club (i.e., not a training center), only a minority of kids will be serious competitors at regional level or above in singles skating. Pairs and dance are almost nonexistent outside training centers. A larger group of local club members will be young skaters aiming to reach regionals as juveniles/intermediates and if possible beyond, but not all of them will end up doing so. And another group of skaters will be those who started later or are unable to train many hours per week or not interested in doing so, who focus on less serious competition tracks.
And some just focus on goals of passing tests or performing club or rink shows and don't compete at all.
Tests and shows are not structured as skaters competing against each other at all. Shows can be fun and informal and involve duets or group numbers. But many skaters do choose to enter competitions even if they're not motivated by competitive instincts, just because it's a goal to work toward and the most common opportunity to show off what they've been working on.
For adult skaters, which is where I have the most personal experience, most skaters tend to be friendly and supportive of the other skaters they compete against. But placing well can be a goal to measure how well we have mastered technical and performance skills.
When the coach tells them they are never going to be an elite skater, the mother resents it.
That is undoubtedly true for some skaters. In other cases, the coach tells the parent or skater what they would need to do to become an elite skater, and the parent or skater tells the coach that isn't what they're aiming for -- they don't have the money for intense training, or they want to skating to be a casual hobby while their top priority is education, or they have other outside interests that they want to continue to pursue alongside skating, etc.
Ideally, skaters will find coaches who are supportive of their personal skating goals and not stuck in a mindset that only elite competition matters.
Of course if their goal is to go as far as they can in serious competition, then they need a coach who can take them where they want to go, and they and their families will need to make sacrifices that more recreational skaters wouldn't make.
If you're looking at the skaters who do make it to Nationals and beyond, you're seeing serious competitors. If you go to a freestyle session at a local rink, or a small club competition, you'll see mostly skaters who are not aiming at serious competition.
Why do skaters take private lessons when not aiming for high-level competition? That has been the model for most instruction beyond beginning levels within the US. I think one main reason is that every skater is different, with different strengths and weaknesses, different learning styles, etc.
Kids who start young and focus on standard-track freestyle competition with a goal of competing at regionals and beyond may belong to a cohort with multiple skaters of similar age and skill level who skate at the same rink. So group lessons at middle levels might serve these average skaters well and let them get more instruction for their money than if they took only private lessons.
But skaters who start at later ages will not move up the levels on the same schedule as either more advanced agemates or younger kids who started at the same time. Skaters who are more interested in artisticly oriented than in technical events will want a different focus in their lessons. Skaters who want to move through the tests quickly will want to train at a different pace than skaters who want to win at each level before moving up. So all of the above might not be able to find a class with appropriate classmates even if the local rink or club tried to emphasize group instruction.
(Oh, and some parents will find it easier to get their kids to the rink before school, some immediately after school or in the evening, some on weekends; some kids may already be homeschooled before starting skating and thus more flexible to skate during the day. When the rink makes figure skating ice time available at all will limit the possibilities, because public skating, hockey, and beginner lessons will often claim the most popular times. If there is more than one choice of figure skating time, it may not be possible to get all the skaters of similar age and skill level into one class all at the same time.)
And of course the minority of skaters who do have high talent and high motivation to win will want to go beyond classes offered for the average standard-track skaters at their rink. Which may or may not be possible with the local coaches.