Not a bad itinerary - flying the long hauls makes sense, and you're pretty much staying along the Adriatic, so not too much time taken up by travel there.
The fact that you're traveling with other people makes cheap hotels or even apartment rental a viable option. Anywhere you're going to be for more than three days, you might want to check out some apartment rentals, as they can sometimes work out cheaper than hostels, when you're sharing the bill. For instance, we spent a week in Budapest with our four kids - it was much cheaper getting an apartment rather than 6 hostel beds, plus we got a lot more room, private bathroom and a kitchen which cut down on food expenses.