With the US dollar as weak as it is, I would not have been able to do the Camino without the fantastically cheap albergues. Even so, while I enjoyed most of them there were times I found it necessary (or simply preferable) to use alternate accommodations.
When I took break days to rest, heal up, and sightsee, I stayed in hotels or hostels (Logrono, Burgos, and Santiago). I liked having private (or semi-private) accomodations where I could sleep in and stay out late. And I was in heaven when a bathtub was available ;-) Of course, these higher-end options were usually to be found only in the larger towns and cities.
In Leon I stayed with an old grad school roommate and his family at their home (I went to his wedding 4 years ago in Leon, and while walking to his parent's place from the train station he casually remarked that people "thought I was a pilgrim" - that was the catalyst for my doing the Camino). They were very hospitable, and even did my laundry (after weeks of hand-washing, my clothes needed it - they smelled and felt great for days afterward).
In Rabanal I stayed for 2 extra nights in the monastery (after one night in the excellent Confraternity albergue), where they offer retreats for pilgrims for whatever you want to pay (i.e. donativo). They had communal sleeping arrangements, but the daily schedule was fairly flexible in order to allow you time to rest and reflect.
And finally, in Santiago I stayed in 3 different hotels - including the Parador (I figured I deserved one night of luxury for my exertions, although I felt out of place among its usual clientele). Again, taking hot baths was simply awesome, and it was nice to be near the cathedral with late-night out and sleep-in flexibility.
I'd say that pilgrims should stay in the albergues at least some of the time, if only to meet other peregrinos and get the full Camino experience. Although I liked the hotels, I felt disconnected from the Camino when I used them. It seemed like I'd traded in my pilgrim cloak for a tourist outfit. Despite getting a much-needed break, I found myself missing the Way, and I was glad to return to the trail and the albergues.
One thing I found interesting - and a bit disconcerting - was the competitive nature of some of the privately owned albergues. A couple were certainly into guerrilla marketing. I saw albergue flyers and pamphlets posted all along the way in certain areas, and when the Camino ran by a road, drivers would stop and hand out flyers - even doing so right in front of rival albergues. One time I encountered a guy puttering down the Camino path on a scooter and handing out ads for an albergue!
Some of the best-equipped albergues were the private ones - clean beds, hot showers, fully-stocked bars, well-prepared onsite meals - even swimming pools. On the one hand, I enjoyed their comforts (which probably forced other albergues to improve their facilities in order to compete - not a bad thing), and I appreciated the fact that the owners were trying to make a living - especially when their service was good. But on the other hand I wondered if they somehow altered the simplicity-oriented spirit of the Camino, with their billboards, flyers, racks of trinkets for sale, and adversarial attitudes towards other albergues. Perhaps that's the double-edged nature of capitalism...