Ok, I'm a 56 year old dude who decided that ny inability to dance was simply ignorance - I had never learned any dance steps! I'm athletic, and have rhythm to burn. (professional musician in my past.). So I signed my wife and I up for lessons at Arthur Murray. (yes, she was pleasantly shocked.). We're making progress, and are clearly waaay better than we were. We've taken about 20 private lessons and about the equivalent number of group lessons.

(Side note - I historically danced two dances per occasion (wedding, etc) - go out on a slow dance, stay for a fast one. She led, and I tried manfully not to embarrass us. Headed for a cocktail immediately after.)

So what's the problem? We went to our 2nd dance party tonight. Marginally better than the disastrous 1st. All of the other people are great! Swirling all over the place. Looking great! No problem - we just stumble through our basic steps (yeah! A rumba!). Then they announce a hustle. Don't know it. Sit down and are enjoying watching the others dance. (They're really good. Mostly silver and high bronze.).

A guy comes up and asks my wife to dance. She agrees and he makes her look good. A lady asks me to dance, and I agree, scared to death. She's good! I don't know the steps! I can't lead her!

We stumble through. She's very kind, and back leads me through the steps.

So, my question - is this just normal learning pains? Are we in the wrong studio? Would it be easier if we were somewhere more crowded with a larger diversity of skill levels?

I feel OK in group classes, but it seems to me our lessons are focused on figures and techniques without learning how to dance to a song on a dance floor.

This is a typical newbie problem. Don't be intimidated, every dancer has been in your position. I would suggest that as a leader, you decline to dance if you don't know the dance. It is perfectly OK to say, "I don't know this dance, maybe the next one." Floorcraft is so important and it is a learned skill. It takes practice, practice, practice. Don't stick to a routine. Learn to put steps together so you can get around the floor. The latin dances are easier since you don't travel (except samba).
Stay closer to the middle of the floor so the more advanced dancers can get around you. If you make a mistake and stop, get off the floor as quickly as possible. Don't stop and walk back to the corner, blocking the line of dance. Everyone should be very forgiving if you observe general dance etiquette.

Thanks for the feedback. Makes sense. Question - is the mix of great / beginner normal? (90% good / 10% beginner) normal, or would some other venue offer a more even mix?