Two places I've stayed and recommend highly, depending on budget:

Villa Maroc (upscale, authentic feel)
http://www.villa-maroc.com/en-villa-maroc/

Hotel Al Arboussas (friendly budget)
http://tinyurl.com/htjgm9r

The medina is a pedestrian zone. Villa Maroc is just inside the wall so a short walk from your grand taxi. Al Arbousses is deeper into the medina but either place you can have help with your luggage, your driver or someone on the spot. I'd want to stay 2 nights myself since you have plenty of time to get back to the airport.

It just occurred to me, whether you stay 1 night or 2 in Essaouira your Marrakech hotel should store your bags. The truth is, if you leave to go back to Marrakech late on your last day, as you say in Plan B, you'll have almost as much time in Essaouira as if you stayed another night.

As long as you're not a nervous traveller and leave Essaoiura by no later than 8:00, you should be fine staying the second night in Essaouira. That would be my choice.

P. S. I stayed at Riad Dar Maya which I enjoyed.

Yes, I'd stay 2 nights too. I'd hate to miss a 2nd dinner in Essaouira. I had one of the best meals of my life there, a fish soup or stew eaten with wooden spoons. I bought several of the spoons in town and think of that soup whenever I see them.

And to think, we had a rocky start on this thread :) and you guys have given me so much useful info!

So I love the idea of spending both nights in Essa, especially given that I don't like unnecessary hotel changes. Where I was coming from is if I stay in Essa on the 2nd night, that means Day 7 is awash, traveling all day, Essa-Marak airport-Lisbon. If I return back to Marak for evening on day 6, that means on Day 7 I can have a leisurely morning, go shopping for a bit, head to the airport at noon for a 2:35 flight.
The other option of course, is to spend the first 3 days in Marak, then 2 in Essa and then 1 more back in Marak, rather than 4,2.

Unfortunately, Villa Moroc has a 5 night minimum. I am looking at

Heure Bleue
Riad Dar L'Oussia
Riad Chbanate
Riad Malaika

Heure is far more expensive than all the others so not sure its worth the money or really necessary to spend this much. In Marrakech we are staying at Riad Hikaya so I am looking for something in the same category.

No, of course it isn't necessary to spend so much. Heure Bleu is one-of-a-kind in Essaouira and I haven't seen the rooms but did sit in the beautiful courtyard for tea. It's easy to find, by one of the gates into the medina. Very close to where the Supratours buses from Marrakech park if you decide to use them, rather than hiring a grand taxi (car & driver). The difference in cost would probably pay for half the cost of your room at Heure Bleu. I'm far from a fan of using buses in general and originally hired grand taxis for my trips to Essaouira. After taking the bus I find I prefer the bus, very comfortable and very cheap. They make a comfort stop at about the half-way point. In any case, I'm sure you'll enjoy wherever you stay. Sorry, I don't know the others you mention.

Clarification of "...by one of the gates into the medina." Not actually gates but openings in the wall, entrances. Presumably originally gates.

Will look into the buses and will ask hotel as well. I think I made up my mind. We will do 4 days in Marak and then 2 full days in Essa like you guys suggested. Still unsure about which hotel in Essa.

back to this thread. Below is the final itinerary:
12/22/16 Marrakech arrive 1pm
12/23/16 10am walking tour, explore Marrakech
12/24/16 Explore Marrakech, visit hammam, 6pm Food Tour
12/25/16 Atlas Mtns tour, lunch at Kasbah Tamadot
12/26/16 9am transfer to Essaouira, arrive at noon. 3pm Walking tour
12/27/16 Explore Essaouira, sunset camel track on the beach
12/28/16 AM transfer to Marrakech airport; 2pm flight to Lisbon

I think your itinerary looks EXCELLENT! Have a wonderful trip and be sure to come back here after and give us a trip report!

PS-is your food tour with Marrakech Food Tours? (I think that's the name of mine--run by an American gal names Amanda who married a Moroccan and lives in Marrakech.) If so, I can guarantee you will LOVE IT! So well done, so many good stops to try foods I never otherwise would have tried on my own and it was just a blast. My guide was Amanda's husband, whose name escapes me right now but he was a wonderful host.

yes thats the one!
thanks!