What I tend to do to start with is ask people what they want to play... you get three basic types of response in my experience:
" I want to play campfire songs on acoustic", or
"I want to Shred/play SRVesque blues like the devil himself", or....
Kids - who either just want to play, or whose parents are pushing them
Everyone gets taught open chords and some basic theory around the major scale, and we move from there. I try to encourage people to go through the formal exams, just to give the technical elements some structure. Say I was teaching the open major chords. The student would probably get E and A, and maybe D pretty OK with a bit of buzz but getting the idea... I'd move on after about 20 minutes and ask them to practice then re-visit it next session. 20 minutes seems to me to be about the limit for attention on one subject. Also, if they are struggling they don't want to be spending their money having you watch them while they keep fighting with it. Some things only come with time. Basically each lesson I cover what we did last time, introduce something new and cover anything the student raises.
For what to teach, check out the RGT syllabus here - it only covers the chords & scales in any detail really, but hopefully it helps.
I don't tend to teach other people's songs much - mostly because I don't have time to learn them. I'll do a few bars or a riff or whatever, but who'd want to pay £30 an hour to struggle through songs week after week?
There's no magic answer to when a student is ready to move on - you have to let them be your guide and have the kind of relationship with your students where they'll tell you what you need to know. Are your students total beginners?