Service industry is playing an important role in country’s economy. As one part of the tourism industry, hospitality industry is also contributing a significant role in delivering quality services to customers. Most hotels in Bahir Dar city, Ethiopia are observed providing limited variety of services while many inimitable features of services can be developed through service innovation and development. Moreover, hotels and resorts around the shore of Lake Tana are not using their location for maximizing their range of services to exceed customer’s expectations. The purpose of this study is to assess the customers’ perception and expectations about hotel service quality by applying one of the measurement tool called SERVQUAL model in three and four starred hotels/resorts in Bahir Dar, Ethiopia. The researcher prepares and distributes questionnaires for 246 respondents. The data obtained from respondents have been processed and analyzed by using Statistical Package for the Social Sciences (SPSS) version 20 and Microsoft Excel. From the findings of the research, customers have greater expectations for hotel/resort services quality dimensions (Tangibles, Reliability, Responsiveness, Assurance and Empathy) than the actual perceptions. As result of these differences between expectations and perceptions, service quality gaps are revealed in all hotel service quality dimensions. The gaps in the Reliability and Empathy dimensions are 0.097 and 0.050, respectively. These two positive gaps indicate satisfaction of customers and the rest negative gaps of Tangibles, Responsiveness, Assurance and Empathy indicates dissatisfaction of customers in the corresponding dimensions. Generally, the findings of the research revealed that the overall quality level of services provided by three and four star hotels are bellow customers’ expectations. ANOVA, correlation and regression analysis were done if there is any difference in the satisfaction level of respondents’ on the ground their gender, age and nationality. The result of these tests shows there was no difference in their satisfaction level of customers based on the above respondents’ demographic profiles. By integrating SERVQUAL and Quality Function Deployment (QFD) models together, major service design characteristics that will help hotels to increase service quality and customer satisfaction are identified. Establishing efficient customer complaint hand system and improving the skill and knowledge of employees are the first and second service design characteristics that hoteliers should focus on. Providing value added products and services as well as product and service differentiation are the two competitive strategies found suitable for the current hotel business.