I have four kids, and they all grow relatively fast (as kids do). So dressing them in seasonal-appropriate clothing each year can get EXPENSIVE. My girls are close to the same size, so it's easy to pass down items to the younger girl as soon as the older girl grows out of them. And most of the time, they still look brand new (or very close to it). My oldest daughter and son, though, depend on me to get them new clothes when they grow out of them, but I can't afford to go to the store and pick up brand new things every time they need a new pair of pants. I have found that gently-used clothing is just as good and a WAY more affordable solution.
Create a "Club"- You've heard of girlfriends getting together and swapping clothes they no longer wear. Do the same with your kids' clothes! Find a few friends and/or family members with kids of slightly different ages and pass the clothes around. Write your initials on the tags (if you want to eventually get them back), and don't include any ripped or stained pieces. Put away the clothes that your kids have grown out of, and at the beginning of each season, when you have a hefty stash built up, or when you've setup a time to get together, pass them on to the appropriate family. This is especially great for those fancy holiday dresses or suits that your kids will probably wear only once (for say, church on Christmas morning).
Check out online auction sites- You can often find "lots" of clothing (for example: 12 pairs of 5T winter pants or 6 sets of size 6 pajamas) for a very affordable price from moms who are trying to make a little money getting rid of all of the clothes their kids have outgrown. And if they're still in good condition when you're done with them, you can turn around and sell them for a few bucks!
Frequent consignment shops- Goodwill and other local resale shops often have hidden treasures at fantastic prices. Find out when they often put the "new" items out on the floor and stop by then. I love to look for unique, vintage-y pieces that have personality.
How do you feel about gently-used clothing for your kids? Do you take advantage, or pass on them?