A problem that might occur (in kyu system) is that students start to dictate what is being practised in the dojo. How so? Different students train for different grades. Everybody requires time to practise their set of techniques in order to prepare for their test.
There is limited time to the test so the teacher must somehow fit all the techniques in the remaining lessons. Next iteration the students want to train for the next grade and again the teacher must somehow fit in that set of techniques. The teacher is no longer in control...
Teaching to the test could be a huge problem, especially if the dojo has testing frequently and the instructor feels that there is no time to do anything but get folks ready for their next exam.
However, I think the whole thing can be much more positive. Testing is a good way for people to mark their progress. Also, the test is not as important as the training that leads up to the test. In my dojo I expect students to use the time before their test to train a bit harder (including outside of normal classes). Our early kyu tests contain techniques that we do regularly anyway, so preparing students for a 6th or 5th kyu test just means teaching basics classes. That's good for everybody.
On those much rarer occasions when we are preparing somebody for a higher rank (say shodan) test there are some classes in which all the students get some experience in harder, more complicated, etc. techniques. That's good for everybody too.
As an instructor I believe that I am obligated to do my best to provide my students with a good grounding in the basics, as well as show them then entire broad curriculum of aikido. That's a tall order, since we don't have infinite time to train. In that sense I am not 'in control' of what I teach - I might want to just do Ikeda Sensei's connection exercises for a month but I don't because it would be a disservice to my junior students.
My $0.02 anyway....