I am still deciding on my view on non-lethal damage:
I can imagine a fighter hitting the targets hands, which means it is unable to continue fighting (represented by the target having 0 HP), but still alive. Which is a reason why non-lethal damage is feasible.
Or a variety of other reflavorings. Tripping, punching, disarming, sundering, etc. Anything that effectively removes the monster from the fight.
On the other hand I think NLD is a way of streamlining the game: in my mind, if you damage the target and it drops to (below) 0 HP and is dying. (unless he drops below his negative bloodied value, in which case the target instantly dies) In this case it should make death saving throw until either the target gets stabilized or dies. Of course it it impossible to roll DST's for every single monster, but I am considering house-ruling that when the players say 'non-lethal damage' it means I start rolling DST's and don't consider it an automatic kill.
You're right, NLD is a way of streamlining the game. It does this by removing the arguments that would come up regarding player wishes to avoid killing certain targets. Earlier versions of the game just tried to make it harder to do, which met with grumbles. Now, it's not up to the DM anymore. No one has to kill anyone, if they don't want to.
You can still have your scenario, though. Have the townsfolk in some kind of a deathtrap, or something, such that if the enemies are killed or even knocked out, the townsfolk will die. Or just state that enthralled townsfolk who fail to defend their master (i.e. are knocked out) slit go into convulsions and die. But don't count on the PCs blaming themselves for that.
If your players would have used non-lethal damage on the enthralled townsfolk, then they probably aren't fans of being given moral conundrums. Maybe talk with them about the kinds of alignment knots they do like to untangle, rather than cut in half.
[N]o difference is less easily overcome than the difference of opinion about semi-abstract questions. - L. Tolstoy