JW: I think you're dead-on when it comes to "challenging but not discouraging." Very succinctly said.
Yes, we are NCOWS, but that doesn't mean our matches should be bench-rest level, high-precision, target contests. I believe we do a very good, consistent job when it comes to rifle targets. It's in the pistol target area that sometimes the "tiny target zealots" can get carried away.
From my perspective, distances must be correlated to target size. Big targets can be placed somewhat farther out; smaller targets should be substantially closer. I believe the object of our game (and our target placement) is to encourage scales that ate tipped slighty toward accuracy over break-neck speed, but we should never, IMHO, use target difficulty as a way to "weed out" competitors or "thin the herd."
I believe our matches should, for the most part, emulate real-world situations as they would have occurred in the Old West. There's no challenge (and very little connection to reality) in shooting a series of 3-foot-square targets at 3 yards out. By the same token, there's no reality connection to making targets so difficult that a person in a gunfight needs to take forever in order to strike their mark -- all the while with others shooting back.
"In all things, moderation" is a wonderful phrase and applies to so much of life as I see it. I believe it's equally true when it comes to our competitions. We should be striving to strike that balance between too easy and too difficult and we shouldn't create a distinct advantage to shooters of either extreme-- the spray-and-pray speed demons or the bench-rest bullseye'ers.
Just my thoughts on the matter.