Pulling out lawns indiscriminately can be a terrible waste.  I live in a high desert area, where water costs quite a bit, and I've seen some horrible examples of what happens when people try to save money by removing their lawns.  I've seen horrible "wildflower" lawns (not to diss yours, Karen--there are beautiful ones, too.)  

People who choose to replace the lawn with gravel often don't realize how expensive this kind of hardscaping is and do a poor job.  Skimping on things like underfabric and depth of gravel leads to an ugly and uncontrollable weed problem.  The effect I like least from the gravel-pit look is that it reflects the summer heat, making the home's yard unusable and bringing the city temperature up a little more.  

Some people just choose to stop watering let the lawn to go weed and seed, which isn't great for anyone's property values.

The nicest lawn substitute I've seen is a well-kept garden, barked or graveled areas, and a small piece of beautiful grass.  I recently bought a home with a huge stretch of front lawn and have replaced it with 250 sq feet of herb garden (herbs are hardy and use little water), about 600 sq feet of colored gravel, a terraced area of water-sipping shrubs, and a nice small patch of healthy lawn.  Upside?  It's beautiful and environmentally friendly.  Downside?  This kind of gardening takes a lot of effort and actually costs a lot of money.  Good gardening is NOT pocketbook friendly, even if all your friends give you starter plants.

My recommendation?  If you want to save money with a minimum initial outlay and still keep your yard looking good, consider 1) adding a timer to your hose and 2.) replacing your current Kentucky bluegrass with something well-tailored to your climate (unless you're in Kentucky, of course.)  Many homeowners aren't fans of the natural/xeric landscape look, but it is possible to have a nice water-sipping lawn that looks just like everyone else's.

Your hose timer should allow your sprinkler to go on at about 2 am, when your water loss from evaporation and surface heat is least.   A hose-only timer won't set you back as much as a full sprinkler or drip-water system, although you may want to put one in if you're digging your lawn up yourself.  

The grass can be one of the good dwarf fescues or grama grasses that are becoming increasingly popular substitutes for traditional lawn.  Digging up the lawn is hard   work and may require borrowing a rototiller and hiring a teenager or two, but grass seed is relatively cheap and much more fun than hauling gravel.

And why not start shrinking that lawn away from the spots where it's not doing so well?  (Particularly under trees.)  Frame your lawn and surround your shade trees with a border of barked-in area.  Bark mulches are cheap in comparison to gravel and reflect less heat.  They also provide a nice setting for the kind of colorful shrubs that could brighten up your yard (and exchange carbon dioxide for oxygen in the atmosphere!)  In my area, those include lavender borders, Russian sages, and many rambling roses. Your local greenhouse or plant nursery will tell you if you'd be better off with yucca or rhododendrons.  Saving water and money can make your property look better, not worse.

Yikes, I have never wasted a drop on watering my lawn.  Just don't need that lush green lawn in the middle of August.  Grass goes dormant, them comes back to life with the fall rains.   I feel sorry for the people who think green lawns are something to be proud of.  However, they are the ones that keep their houses closed all year, running the AC all summer, as soon as the heat is not needed.  I guess they need something to look at from their windows.

I am also slowly converting lawn to garden, each year I dig out another patch and plant in beneficial plantings.  They take water the first year, but after that on their own.  And my yard looks much better than anyone else's in the neighborhood, due to the sheer variety of things growing.  All lawn is BORING.

When I moved into my house in West Texas, the lawn was dead (not all "grass just goes dormant" without rain - if it goes long enought without water, it dies).  Since I had to start over anyway, I decided to put in a hybrid buffalo grass (Turfallo) (vs. the Bermuda grass that is most often used in the area).  This requires half the watering and half the mowing than the Bermuda and looks just as green.  Since West Texas does not get much rain, this is the perfect choice.  In my flowerbed, I planted drought-tolerant perennials.  Having a green lawn is not bad, and having a lawn full of flowerbeds/gardens will not necessarily save water/time.  You just have to choose the grass/flowers that are right for your area.

The commenters above all make great points!  if you’re thinking about replacing your lawn, or just want to curb its maintenance costs, your County Extension Service can help you select the right type of grass for your area, as well as provide information on excellent lawn alternatives. Just be sure to check with your homeowners association (if you have one) before starting, as several have pretty strict policies regarding front yards.

If you live in the right climate, Buffalo grass is a good alternative.  There are two commercially-produced varieties - Cody and Bowie - that have been specifically bred to be a good lawn replacement.  They have a brighter green color than "regular" buffalo grass, and they green up earlier and stay green longer than the native varieties.  They also grow well across almost the entire country, except for the northern areas.

Advantages of buffalo grass are many.  First, it requires FAR less water than what is normally used for lawns.  In most climates no watering is needed, the natural rainfall will be enough once it is established.  Secondly, it tolerates high heat and drought conditions very well once established.  Whereas a bluegrass lawn will go dormant or in severe cases die off entirely, the buffalo grass will be perfectly happy.

Furthermore, buffalo grass is an effective natural weed barrier.  An established buffalograss lawn needs very little in the way of weed control. My father runs a lawn business and one of his customers has a buffalo grass lawn covering several acres of land, and nothing more than spot spraying of an occasional dandelion is needed for weed control.  The established grass grows so thick weeds can't take hold, and the few that do tend to get choked out.  That saves both the pocketbook and the environment from herbicides.  Along similar lines, since buffalo grass grows slower, it needs much less frequent mowing to keep it looking good.  Since its natural maximum height is only 6 inches or so, some people simply never mow it at all.  Those who do rarely need to do it more than once a month.

Finally, it's tough grass.  It can take kinds of abuse that bluegrass never could.  I've planted buffalograss along the west side of my house. Visitors frequently park there because my driveway only has room for two cars.  Since the west side of the house is along the alley, two or three more people can park there.  Bluegrass can't take that kind of abuse without ending up with dead patches.  Buffalo grass can, which is why I selected it when I decided it was time to get rid of the weeds and plant something good for a change.

My yard has huge trees both front and back, so it's shady and a lot of things don't do well, for example vegetables. The back is a wooded area completely carpeted with sticks and branches, way too many and too small to pick up,  so it's very hard to mow the weeds that come up in between.  I do have some clover in the front and a nice patch of hosta in the back under a huge lilac bush, so I'm letting them both run wild, hoping to have some nice ground cover in a few years that doesn't have to be mowed all the time.