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Service quality is the core issues in hotel industries. Although budget hotels attract attention with low prices, they also need to win customers with service quality to achieve its market share. Improving customer satisfaction through service quality is an important factor in managing and operating budget hotels. This study undertakes service quality in enhancing customer satisfaction through the SERVQUAL model. Service quality is measured via five attributes, i.e. tangibility, reliability, responsiveness, assurance and empathy in formulating a framework of customer satisfaction. A survey was conducted empirically on budget hotels in Shanghai to accumulate data and analysed to verify the hypotheses. This study is important as in ensuring special positioning of budget hotels in developing an excellent service quality.