Good news comes in the fact that hotels in Cusco tend to be quite cheap even though standards are fairly high. Several hostels have opened up so if you are a backpacker type you have that option, though the money you’ll save on sleeping is almost meaningless compared to the cost of everything else.
Hotels in Cusco are at their fullest during the high season lasting from May through October. This is also the dry season and when Machu Picchu and the Inca Trail are in highest demand. During this period it’s not a bad idea to book a room in advance, especially if you want to be close to the center of town surrounding Plaza de Armas. Cusco keeps expanding outward and most of the newer hotels are quite a long way from the center of the action.
If you are going during the low season, from November through April, you should be able to pretty much pick your hotel upon arrival, and you’ll often get a great discount in the process. The city is in much lower demand during the wet season and competition among hotels gets fierce, partly because much of their revenue comes from selling tours to guests, so they can afford to let out rooms cheaply and still do okay if you book through them.