Increasingly, hotel industry has witnessed rapid growth in the 21stcentury and as a result competition within the industry has also intensified. This competition has been fueled by the preoccupation of service quality to add value and strengthen the complete guest experience. However, a major challenge facing the sector is the aspect of service quality particularly in budget hotels which target price sensitive customers. These hotels provide the customers with satisfactory core product at a reasonable price but tend to focus more on profits than on customer satisfaction. The services offered are not standardized and service quality variability is a challenge. The study used an integrated SERVQUAL and Gap model to evaluate customer satisfaction in budget hotels in Nairobi City County, Kenya. The specific objectives of the study were to determine the effect of service design on customer satisfaction, establish the effect of service delivery on customer satisfaction and determine the moderating effect of management perception of service quality on customer satisfaction in budget hotels in Nairobi City County, Kenya. The study adopted a cross sectional survey design and was conducted in 50 budget hotels. A sample size of 334 drawn from the hotel managers, customers and employees were involved in this study. Systematic random sampling technique was used to select the study sample for customers and employees. Data were collected through use of questionnaires and interviews. Both descriptive and inferential statistics was used in data analysis. The study hypotheses were tested was tested using multiple regression (ANOVA) and qualitative data from management perception was analyzed using qualitative data analysis (QCA). The regression analysis indicated that all five dimensions of service quality in service design were significant (0.000) when tested at 95% confidence level. The model was found to be significant. Correlation analysis indicated that the service design factors that had significant impact were realization of assured service in reliability (p = .044 < .05), responsiveness in informing the customers about the time of service delivery (p = .000< .05) and empathy in that operating hours are convenient to customers (p = .030 < .05). The other variables did not have significant values. The results indicate that there are gaps in the budget hotels under study between service design and customer satisfaction. Relationship between service delivery and customer satisfaction was found to be positive but not all the variables were significant. The study findings indicated that four variables; good location (p = .115 > .05), closeness to main city facilities (p = .527 > .05), someone recommended hotel (p = .665 > .05), and good experiences from the hotel (p = .458 > .05) did not have no significant values. This implied that these variables did not have an effect on customer satisfaction resulting in a gap between service delivery and customer satisfaction. This indicated that the service delivery did fully not meet customer expectations. Management perception was found to have a moderating effect between service quality and customer satisfaction. The study concluded that although managers seemed to have a reasonably good understanding of the customer and developed service designs for quality service delivery, the services delivered still fell short of customer expectations. The study therefore recommends that to enhance customer satisfaction, management needs to focus on the changing needs of their customers and develop service designs that twill offer service delivery that satisfies the customer. The study makes some contribution to the body of knowledge as an integrated model in evaluating customer satisfaction.
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