Whether this is hearsay or not, I seem to have quite a lot in my head about Japanese love hotels. I would love to cite references I really would, but as most knowledge I just kept the info, not where I first read or heard it, so take with a pinch of salt!
Many Japanese live with their parents until they get married, mainly for economical/financial reasons. Similar to in the U.K if they don't "escape" into their own little flat after leaving Uni and dorm rooms, they may end up back at home for many years.
This makes dating impractical in that you can't take even a quite serious boyfriend back home to stay over and spend cosy time together, whether this includes sex or not, while Mum, Dad and little brother are all in.
In this situations couples choose to stay in a hotel together, I know this happens in the UK too for people in similar situations, just seems that Japanese hotels cashed in on the idea, and started making hotels that cater especially for couples who want just a couple hours alone together not in a public place such as a restaurant.
Once (if) the relationship gets serious enough to introduce to the parents, they may still choose not to stay in the small, paperthin(literally) walls of Japanese houses with the parents in the next room.
The so called love-hotels also get used for one-night stands, affairs and anything else you can imagine due to the convenience, however I doubt this was the original intention of them.
Spin off hotels offer themes, from the relatively harmless cute/romantic pink and fluffy covered in hearts type all the way up to catering for the serious fetish markets. Extreme examples of these tend to be those that hit western news, as "shock horror those Japanese perverts are at it again"
As always this is not the norm, otherwise it wouldn't be news right
Most Japanese business/budget hotels seem to also offer a on the night, or by the hour rate if you know who to ask or where to look.