Amazingly enough, this blog post will not be about Super Smash Bros. Brawl (though I suppose it is tangentially related). Instead, want to talk about a more general concept of alternate costumes for characters, particularly in RPGs. I would talk about their role in fighting games and the like, but that is straightforward enough that I don't think I have ever seen it done in an ineffective manner (though the quality of the costumes themselves is always up to debate in some games). However, in RPGs, alternate costumes tend to be poorly implemented.
One major problem facing alternate costumes in an RPG is that choosing a character's costume is not a choice made independent of other concerns. For example, in Ar tonelico, the Reyvateil's alternate costumes are equipment that control stats. In Tales of Symphonia, you need to give up a title that boosts your stat gains at level-up in order to use an alternate costume. In Xenosaga Episodes 2 and 3, alternate costumes take up skill slots (in Episode 2) or an equipment slot (in Episode 3), and while they have stat benefits, they tend to be sub-optimal choices in the long run. In all of these cases, alternate costumes may as well not exist as an option, because players tend to go for options that give the most mechanical benefit, rather than the options with the most pleasing aesthetics. However, other games demonstrate that such a choice is not necessary. For example, Star Ocean: Till the End of Time has a system where you can simply change character costume between several different options independently from any other choice, simply by disconnecting it from any other system. Another interesting option is seen in Wild ARMs 5, where costume is linked to armor, but there are whole sets of armor that give the same alternate costume and similar types of stat benefits. The implementation is not perfect in that game, but the idea of linking different costumes to a sets of armor with different stat benefits is a good one.
A related issue to the above is the direct linking of the appearance of a character's clothing to equipment, seen in many MMORPGs and some other games, like the PS1 RPG Legend of Legaia. I suppose that there is no problem with this in theory, but in execution the effect tends to be flawed. Too often, a player character looks terrible because of mechanical reasons such as optimal sets of gear being created by mixing bits and pieces from different armor sets, coherent sets being difficult to assemble, or coherent sets not existing in the first place. One solution is for the designers to design armor sets so that optimal sets of equipment match together well into a decent-looking character model, and to avoid creating situations where the best option is to mix gear from very different looking sets of equipment. Of course, a good alternative is to use the same system as the Phantasy Star Online games and separate equipment (which constantly changes) and character appearance (which is set when a character is first created), so they are not dependent on each other.
One other thing worth noting about console RPGs regarding alternate costumes is that most of the time they seem to only change for battle scenes, but not for field screens or story scenes, which can be somewhat jarring and annoying. I suppose this is probably a technical limitation, and it might be already be on its way to being a thing of the past if some of what I hear about Lost Odyssey is true, but it is worth mentioning that having that kind of difference between battle scenes and everything else should be avoided if possible.
Anyways, a lot of what wrote about concerning RPGs can be applied to other kinds of games, as well. For example, you can chose alternate costumes in Drakengard, but you have to equip a costume-type Orb as your only accessory to do so, which means you need to give up one of the defensive items or other powerful accessories that are necessary to survival in that game, making an alternate costume a very poor choice (as a result, I never used one, no matter how much I liked the alternate looks themselves). In contrast, the Way of the Samurai games make appearance something you can control whenever you start a new game, and you are free to chose whatever you like without worrying about affecting something important. Also, as I said before, fighting ames tend to get this right almost every time, and set a good example. Overall, I think the freedom to make a character look cool is more important and valuable than the mechanical variety added by making it a choice based on opportunity cost.