By reducing the size you're reducing the quality. But isn't that the point of Blu-rays?
Too an extent. Firstly you can reduce the size by dropping the extra weight. Multiple languages, multiple subtitles, extras, commentary, etc.
Secondly, don't confuse compression with a noticeable lose in quality. Its there but depending on how its encoded there is a high chance you could not tell even side by side. Are you happy with streaming/downloadable content (iTunes etc)? If so you can do at least as well as that if not much better.
Third, how much quality do you need before the file size has diminishing returns? Are you displaying the media on a 150" screen or a 55" HDTV. Your average size HDTV is a lot more forgiving when it comes to quality.
Also depends on the media you are encoding. Do you need the same quality for some goofy slap stick comedy as you want for some beautiful movie filled with special fx?
There are the purest out there that want every bit of quality possible but for your average/enthusiast movie watcher its not required.
I'll catch some flak for this but I encode at 720p without enough of a quality lose to be noticeable to an average viewer. I end up with very manageable mp4's ranging from 2-6gb. You'll need to play with Handbrake (or similar program) for a while to find what works best for you.