Why do people choose to vacation for $500/night at hotels instead of at a $200/night hotel that is 80% as nice?

When in Siem Reap, Cambodia, I stayed at this hotel: http://www.residencedangkor.com/web/pang/rooms_suites_explorer.jsp I did not book it, nor would I have if doing it myself. Anyway, I was having some minor problems with the Wi-Fi network. I called the main desk, and they said they would send their IT guy up to fix it. Which they did. The hotel has their own IT guy. So there's that.

As in all businesses, you charge what the market will bear. With Hotels, there is a needed rate of return to cover the large investment in real estate. In the case of resort hotels, a large part of the investment is the land, which is typically many hundreds of dollars per sq ft, or many millions per acre, before the heavy construction cost, (everything has to be boated in). There is greater disparity between a five star and a three star hotel in the more upscale vacation destinations than in convention cities, because, high demand of the middle class pushes the mid priced hotels higher, further allowing for a greater price that the wealthy are willing to pay to avoid being around the plebeians. Those hotels, in order to maintain the many amenities that their wealthier clientele seek, such as spas with twenty types of treatments, with spectacular private views, golf courses, an employee ratio double that of the lower end hotels, must further invest large sums in order to separate themselves from the rest. They would also rather have a higher base price, and occasionally offer deep discounts in order to increase occupancy to a more optimal level, whereas the middle and bottom tier hotels will tend to market their discount programs to business groups, AARP, and airline and credit card rewards programs in order to have 100% occupancy. Restaurants are subject to the same issues of return on investment, greater variety of distinguishing chef-designed menus, lower table density, frequently upgraded architectural and interior designs, supply and demand of their target market.

I am going to try and keep this short: I know some marketing people would love to say that it's "perceived value".  It's true that much of traditional luxury is about perception of exclusivity, and marketing "the look and feel" is incredibly important. But, a "real" hotel is run off a "uniform system of accounts" which tracks every line item part of the hotel down to the penny (almost).  Your "80% as nice" sounds quantified, but it is qualitative, while the Grand Wailea owners and managers would be happy to show you how they are justified in charging more per room.  Compared to that $200 a night spot: Possibly the thread count is higher in the sheets. Maybe a robe (or better one) is included, with slippers. The TV & interface might be more modern. The Wireless might be incredibly fast. The beds might be like sleeping on heaven.  The key card system might be more reliable. The staff may be more polished, happier, more helpful, and genuine.  Breakfast might be included. The ingredients at meals are fresher, more inventive, and better prepared. The interior design may be less dated, more interesting, enhancing your mood.  The amenities in the bathroom are artisan made by a member of the community.They may have better security in the parking lots. I could do that forever. I thought of posting an OSE (operating supplies & equipment) list that gets into the minutia of plungers, or a chaffing dish finish level, or the type of dance floor for the ballroom), but that's over the top. The rate at a hotel is (usually) *rigorously* defined, and isn't magically arrived at with hopes, assumptions, etc.  There are certain "finish" levels that will increase the rate, even if you aren't the type of traveler to notice them. I think the best example is toilet paper.  You can spend a little, or you can spend a lot.  You can tell a lot about whether a luxury hotel is in "business" or "hospitality" by the quality of their TP. =)  I will pay a higher rate for the nicer TP. lol

A lot of these hotels cater to business travelers.  What some company - working with hotels directly or through an agency - pays for these rooms is anyone's guess. For individuals, there are at least three reasons I can think of right now; Unfamiliarity with the market and prices - most people don't vacation that often.  Most people don't honeymoon that often.  They read all the advertising and get persuaded that there is additional value above and beyond what a $200 room offers.  Even if that additional value ends up being nothing more than $5 worth of rose petals on the bed and a $10 fresh fruit basket each day. Social signaling - look at your Facebook stream and see how many people post pics of things like fancy glasses of wine, expensive restaurants, private tables at some club, 1st class air tickets.  People like to feel special and people like to feel pampered. Country club effect - if you surround yourself with people paying $500/night, it's going to be a different crowd compared to some Expedia shoppers who got a room for $40 at the hotel next door.  Traveling around Africa, some of the most fascinating people I met was in expensive hotels/lodges/similar.  They were successful leaders in their industries and they had interesting things to say.  Sure, "interesting" is not necessarily defined by income, but this is a subjective metric.  IMO, poor people tend to have very similar subsistence lives, whereas richer people tend to be all over the place in terms of what they are doing in their personal and professional lives.  It is a world I don't get to see much of, making it a lot more interesting to me. I'm sure that there are more reasons, just as I'm sure that the actual people staying in $500 hotels rarely mention any of the 3 reason above.