I have my nonfiction by subject (animals, science, around the world, math, maps and globes, holidays, etc.) and my fiction by guided reading level using the Scholastic Book Wizard. I find the same thing as ACRteach: I teach, teach, teach 'good fit' books, but my students are generally only exposed to books at school, and so they're so enthusiastic that they dive in and decide everything is a 'good fit,' even if they're a B and the book is an N. I do have a few bins that are not leveled, like Curious George, ABC books, song books, etc. When they choose for their book boxes or for a take-home book daily, they choose from their leveled bin (some will special-request a specific book outside their bin and that is almost always granted). This way the parents don't get frustrated by helping a C kid try to battle through an H book. Their book boxes may include 5 from their level and 2 from any bin in the library, so they have access to high-interest books as well as on-level books. They are allowed to switch book box books any morning during morning work as they trickle into the room over 15 minutes to prevent boredom. I also find that they're not competitive. When a child moves up, the others get excited for them, and when they're reading in buddies, sometimes a higher reader will purposely choose a lower book from their partner's bin without me saying anything.
DO what makes sense for you, because you'll be maintaining it!