Try camping on Marathon Key insted. It's WAY Cheeper and loads of fun!!
The cheaper hotels in Key West are the hotels near the airport like the Comfort Inn, Days Inn, Best Western, and Radisson. They are around $100/night. I've stayed both the Best Western and the Radisson. Both were decent hotels.
If you stay directly in the Keys it's not cheep. If you can, go north to about mile marker 50. They have lots of nice lodges, motels and Inn's along that road. Pick up one of those travel magazines at any gas station. They have discount coupons in their. Hope it helped. Go to Fat Tuesdays if you want a cool cocktail!
never stay at a motel although it may sound good try going on the travel channel for some help