Understanding Colocation Pricing and How It Works

Does your business need space for servers, storage, and networking? If so, renting space at a colocation data center can be a great option. 

Before you take that leap, it’s vital that you understand colocation pricing, as well as the services and support that you’ll receive from your provider.

With that in mind, let’s dive into data center colocation pricing, how it works, and what factors impact out-of-pocket costs. 


What is Colocation Pricing?

Colocation pricing refers to the cost associated with renting space for data center equipment. 

Unlike traditional hosting, colocation providers give businesses the physical space, power, cooling, and security necessary to house their equipment. Colocation centers also offer connectivity to various network service providers. 

Traditionally, you would have two options when building out data center infrastructure. The first and most cost-prohibitive approach involves hosting it in your own facility, setting up the data center, and taking on all of the expenses that come along with it. 

The other common approach is managed hosting. Many businesses enjoy the convenience of this approach, as the provider oversees everything. You lease the servers and other equipment while they handle the tedious back-end administrative processes. Naturally, pricing for managed hosting is higher than colocation hosting pricing. 

A similar approach would be to use cloud providers, but this carries many of the same disadvantages.

With a colocation, you own the servers and other core hardware. The provider offers network connectivity, cooling and power systems, and other support infrastructure. Your fees are lower, but your initial equipment costs are higher. The perk is that you maintain total control over critical equipment. 


Colocation Hosting Pricing

Colocation hosting pricing is influenced by several factors, including the following:

  • Required rack space and square footage
  • Power consumption
  • Location 
  • Bandwidth needs
  • Whether the provider offers add-on services 

Prices can range from a few hundred to thousands of dollars per month, the biggest variable being your space needs. Renting a single rack will cost less than leasing an entire server room. 


How Does Colocation Pricing Work?

Typically, colocation providers charge a monthly fee based on the rack space that your equipment occupies. If they offer any bonus services, such as disaster recovery, these add-ons will be factored into your monthly price. The fee also includes basic power and cooling requirements. 

However, your pricing can be higher if you consume extra power or use more bandwidth than anticipated. Generally, providers will charge you every month and lock rates for a year. There are exceptions, but month-to-month terms are quite rare. 

While colocation services are meant to alleviate high IT costs, you shouldn’t necessarily chase down the lowest price. 

Instead, consider how much bang you’re getting for your buck. If one provider is a bit more costly but offers disaster recovery and data backup, they are likely the better option. 


Do Colocation Prices Vary Across Data Centers?

Colocation prices can significantly vary across data center providers. The same provider may have different prices among their centers due to location-based cost variances. 

The tier rating of a data center is another factor that impacts pricing. This rating indicates the level of redundancy and reliability the provider promises. 

Generally speaking, lower-tier data centers in rural areas have lower colocation prices than those in metropolitan areas. Still, there may be benefits to having a center located in a large city. 

Most notably, accessing the facility, setting up and maintaining equipment, and connecting with the provider will be easier. 


Role of Level Agreements in Colocation Pricing

Service level agreements (SLAs) guarantee the quality of support and services you’ll receive from the provider. Typically, the agreement will address reliability, service uptime, performance, and other offerings like disaster recovery or bandwidth. 

Once you enter into an agreement, the provider is obligated to uphold their guarantees. Many providers will include clauses that allow you to terminate the contract if they consistently fail to honor their guarantees. 

That said, these promises come at an expense. The more promises a provider makes, the higher your costs will be. Maintaining a higher-tier facility and guaranteeing exceptional uptime requires resources and personnel. 

Therefore, you should always read every line of agreements before committing to a provider. Pay special attention to pricing, contract length, and add-on fees that could impact your bottom line. 

Typically, the colocation price is locked in for the length of the agreement, but some providers may have extra fees. 

Additionally, consider what level of reliability and uptime you require. While you don’t want to partner with an unreliable provider, choosing a tier consistent with your needs is a great way to keep costs in check. 

For instance, if your business needs a Tier I data center, entering a colocation agreement with a Tier IV facility can be wasteful. 


Components in Colocation Pricing Agreements

Typically, coalition pricing agreements will include the following provisions:

  • Space Rental: Outlines how much space you are leasing and what it costs 
  • Power Usage: Lists your base power usage allowance and fees for overconsumption
  • Bandwidth: Internet connectivity and data transfer rates 
  • Additional Services: Extra services like tech support, enhanced security, or disaster recovery 
  • Tier: The facility’s tier, implying the power and service level you can expect

Pay particular attention to overconsumption fee schedules and data transfer rates. 

Many times, it’s better to pay a little more upfront to increase your power and bandwidth allowance rather than incur overage fees. 


Considerations to Make for Colocation Pricing

Colocation services are meant to be a cost-saving move. The question is, what will it actually cost you to lease space in a colocation facility? 

There are no easy answers, as many different factors influence your costs, including the following:



Before you dive into any other details, consider where you want your data center to be located. The location of a data center can significantly impact pricing. However, you want the facility to be close to your business for easy access. 

For instance, a Houston colocation center will probably have lower rates than a facility located in downtown New York. If your company is headquartered in Texas, the Houston location can be a great option. 

On the other hand, if you are located in New York City, it may be worth paying the premium location price — even if your business is smaller.

That said, there are workarounds. If you partner with a provider who offers both colocation and managed hosting services, they could help with the initial setup and then transition into a colocation role. 

You’d still own the hardware and be able to unlock location-based savings. 



Next, determine how much space your hardware requires. Colocation space is often sold in rack units, half or full cabinets, or private cages. Of course, more space means higher costs. 

However, many providers offer volume-based discounts, so ask about various pricing options and look beyond your current needs. For example, a half rack might hold 21 servers, whereas a full rack can hold up to 42. 

If your business currently needs 20 servers and is preparing for an expansion, it would be wise to lease an entire rack. You’re going to need that extra space sooner rather than later. 



The type and amount of hardware you need can greatly influence your costs. High-density serves may require more power and cooling, driving up your fees. 

So, when obtaining quotes, talk to providers about your equipment. Give them a comprehensive list of the hardware you want to install at the facility so they can provide accurate colocation pricing estimates. 

The amount and complexity of hardware you install could also influence the cost of other services. For instance, if you install 42 servers, the cost of backup and recovery services will likely be higher than working with 21 servers.



Power consumption is a critical driver of colocation price, so understand your equipment’s power requirements and how the data center charges for power usage. Some providers charge per kilowatt hour (kWh), while others build a baseline of usage into your fee. 

The per kWh approach will lead to fluctuating monthly costs. However, it also means you aren’t paying for power you don’t use. 

When the provider builds power consumption into your fee, your monthly expenses will be stable. There is an exception: If you go over your allotted kWhs, you’ll be charged overage fees, which can be extremely high. 



Some data centers offer multiple connectivity options and speeds. If your provider has connectivity options, consider several packages to determine the most cost-effective and practical approach. 

While you may not need the highest speed available, don’t sell yourself short, as doing so could impact performance. 

Premium connectivity services can be exceptionally expensive, especially in metropolitan areas. Also, remember that you will typically be locked into the connectivity level you choose for the duration of the contract. 

Most providers will let you increase your connectivity level but not drop it during the lease period. 



Not to be confused with latency, bandwidth refers to the transfer speed of your data. The higher your bandwidth, the faster you can send and receive data. 

Latency measures the time it takes data to move to its destination. Think of latency as the time between when data is sent and when it arrives. 

Imagine that a racecar is about to complete a quarter-mile course. The car’s speed is measured in miles per hour, and the time it takes to complete the course is measured in seconds. In this analogy, bandwidth is equivalent to speed, and latency is equivalent to time.

When entering into a colocation agreement, you’ll likely get a chance to select your bandwidth. Higher bandwidth can reduce latency, but it’s not the only factor. 

Therefore, don’t rely on it as the sole lever to minimize latency. 


Disaster Recovery

Disaster recovery services are an add-on that many colocation providers offer. While you don’t necessarily have to sign up for them, doing so is a great idea. 

After all, imagine the business impacts of a data loss or breach. Would your company be able to survive? If you take advantage of disaster recovery services, you’ll ideally never have to find out. 

Disaster recovery isn’t a service to cut corners on. Pay for quality recovery and backup support so you can have peace of mind that your business can weather any storm. 


Get More Advice on Colocation Pricing

If you’re curious about working with a colocation, it’s worth talking to the experts. 

Contact us so we can help you discover your needs and determine whether a colocation is suitable for your situation.