One suggestion was to provide high quality gear throughout the pool sessions and then rent crap gear for the OW dives. The idea was that if the students knew that doing their OW dives with good quality equipment would require them to purchase their own, they would be more likely to purchase a full set of gear prior to their OW dives.
I've heard you tell this story, but I really find this kind of manipulation distasteful. Probably makes me a horrible businessman, but I believe in providing a good product and training. I'm not against having students trying bad gear to know the difference (that's educational), but I wouldn't have them doing open water dives where they are performing skills. That's just inhibiting their learning.
I agree with your distaste, but the characteristics of the LDS market might support what he did economically (if not morally).
1.) If the business model relies on gear set sales to new divers, and not a lot of repeat business, then a focus on 'value for customer' may not pay off long-term as well as, oh, say, selling a car to someone who comes to you a few years later when the family needs another.
2.) 'Crap' gear doesn't necessarily mean unsafe or miserable. Analogue gauges, worn looking BCD, not weight-integrated, ratty-looking wetsuit, unintuitive cheap dive computer - it might not look good sitting next to a shiny brand-new ScubaPro gear package, but could work fine for checkout dives.
Analogous situation - let's say a car dealership offered driver's ed. classes. They might use a rough-looking old 'beater' car for road instruction, unless the student brings a car. That old beater might work fine for driving (maybe the AC and radio are out).
3.) Cognitive bias may be in your favor. Once students buy the gear, they can admire it and view themselves as the proud owners of high quality gear (after all, deep down, don't you want the best?), or as gullible fools who got taken.
I'm not approving of what the guy suggested. If I were a student and learned what he was doing, I might take their classes but buy my gear off the Internet.