We've definitely done it "both ways," but the only event for which a costume is an absolute must is the Perfectly Princess Tea Party at Grand Floridian -- everyone is in an Aurora costume.
Otherwise, we try to buy "normal" dresses with the princesses embroidered or smocked on them instead -- more comfortable and just as cute for pictures.
For DD4's 3rd birthday at CRT, I carried her cinderella costume all day long for the perfect picture. When it came time to dress for dinner & pics, she had a fit -- she did not want to be Cinderella, she wanted Belle. Her grandmother ended up making a quick (and expensive) trip to Tink's treasures for the full Belle costume. I've come to think that she can only wear a costume if we are going straight to a particular meal or event and planning on returning to the resort afterwards. DD is never going to be happy with her morning's costume choice after being innundated with images of all the other princesses all day long!
DS5, however, will be the one in the giant Stitch costume wherever he goes -- we can't convince him otherwise and he's just stubborn enough to deal with all the extra arms for hours on end!
