July 9, 2025
by Sudipto Paul / July 9, 2025
Managing mission-critical workloads, ensuring regulatory compliance, and reducing IT overhead — these are the challenges modern infrastructure teams face daily. While public cloud remains attractive for burstable or dev/test workloads, many organizations eventually hit a threshold where performance, cost predictability, and control become non-negotiable. That’s where colocation comes into play.
Colocation data centers offer a practical path for businesses that want to maintain ownership of their hardware but no longer want the burden of managing physical facilities. Whether you're consolidating aging data centers, optimizing cloud spending, or preparing for a compliance audit, colocation provides a secure, scalable, and cost-efficient alternative.
In this guide, we go beyond definitions to help you evaluate if colocation is the right next step for your infrastructure strategy. You’ll learn how it works, who it’s ideal for, how to evaluate providers, and what kind of ROI you can expect.
Colocation data centers become especially attractive when businesses need greater control and compliance than the cloud allows, but don’t want to invest in building and maintaining a facility themselves. Many companies also use more than one colocation site to decentralize risk, improve redundancy, or move closer to users for better performance.
A colocation data center is a third-party facility where businesses rent space to house their own servers and IT infrastructure. Unlike managing an on-premise data center, colocation allows companies to offload the burdens of power, cooling, physical security, and network access, while still retaining full control over their hardware.
Within these centers, data center infrastructure management (DCIM) tools are used to manage and organize the different components involved, such as hardware and assets. In most cases, the actual hardware in a colocation data center is owned by the company using it and is simply housed in the shared data center.
There are three main types of colocation data centers, each based on the amount of storage space a business needs. Let’s explore them!
Also known as carrier hotels, these colocation data centers are typically shared by several businesses at one time. Each business will have its own designated space within the data center, either a rack or a section of a larger rack. For companies that need more space, there may be an option for their own private room.
Companies that want an offsite data center but need the entire space will usually take a wholesale option. This is typically cheaper in terms of data center colocation costs per square foot, as the whole space is being rented to one company.
As many companies now use cloud-based storage solutions, a hybrid colocation data center typically involves a combination of offsite, physical data center space and storage space that’s kept in-house at the organization.
Even small businesses need reliable storage for their data, but not all the physical space to house server racks or other infrastructure needs. When this happens, businesses can rent colocation data center space to meet their needs.
The hardware used by these businesses is typically provided by them rather than the data center. But, the building, networks, security, power, and cooling required to run these systems are all included in the rental price by the data center owners. As businesses share this space with other companies, these operational costs are lower than if they worked with a data center for their own exclusive use.
What’s more, the center providers typically ensure that standards are high. This means backup generators in case of lost power, multiple network connections, and robust disaster recovery options are always in place.
By using colocation data centers, businesses can take advantage of a number of benefits compared to using their own in-house data centers, such as:
While colocation isn’t the right fit for every business, there are clear tipping points that make it the preferred choice over traditional on-premise infrastructure or fully cloud-native environments. Below are the most common real-world scenarios where colocation becomes strategically and financially compelling:
Public cloud platforms offer elasticity but can become cost-prohibitive for workloads with high data egress, long-term storage, or persistent compute needs. Similarly, aging on-premise environments often hit physical space, power, or cooling constraints.
Colocation data centers offer a middle ground: businesses maintain control over their hardware and configurations, but outsource the physical environment and utilities to a professionally managed facility.
Applications that demand real-time processing, like algorithmic trading, live video streaming, or multiplayer gaming, cannot tolerate the variability introduced by distant cloud zones. Colocation data center facilities located near major interconnection hubs or regional users enable ultra-low latency performance, giving businesses a competitive edge.
Regulatory frameworks like HIPAA, PCI-DSS, GDPR, or FINRA impose strict controls on data storage, physical access, and network segmentation, requirements that can be difficult to enforce in public cloud.
With colocation data centers, businesses own their servers and maintain granular control over security policies, while benefiting from facilities certified for multiple compliance standards.
Instead of building and managing a second data room, companies replicate critical systems to a colocation facility in another region or state. These sites serve as hot, warm, or cold DR targets, ensuring continuity during outages, natural disasters, or cyberattacks.
Owning the full stack of physical infrastructure, UPS, HVAC, security, fire suppression, requires not only capital but 24/7 operational support. Colocation data center shifts these burdens to the facility operator while letting internal teams focus on application-level management, devops, and growth initiatives.
These scenarios are frequent, high-stakes triggers for evaluating a shift to colocation data center. Once a company hits one or more of these inflection points, the next step is often deciding how colocation stacks up against other infrastructure models.
When evaluating infrastructure models, most businesses are choosing between three main options: colocation, public cloud, and on-premise data centers. Each comes with distinct trade-offs in terms of cost structure, scalability, control, and operational burden. Here’s how they compare in real-world terms.
With colocation, businesses retain full ownership and control over their physical hardware, servers, networking gear, storage, but outsource the facility itself. Power, cooling, redundancy, security, and network access are handled by the colocation provider. This strikes a balance between capital expense (you still buy and maintain your own hardware) and operational efficiency (you’re not managing a building or HVAC system).
Colocation appeals to companies that want predictable monthly costs, lower latency (by placing servers closer to end-users or exchange points), and strict compliance posture without giving up hardware control. It’s also easier to forecast costs compared to the cloud, where unexpected usage spikes can break budgets.
Public cloud platforms like AWS, Azure, and Google Cloud offer near-instant provisioning and infinite scalability. You pay only for what you use: compute, storage, and bandwidth on a consumption basis. For startups and teams with volatile or seasonal workloads, this flexibility is powerful.
However, this model offers the least amount of control over infrastructure, and costs can quickly spiral as usage increases. Compliance is handled through shared responsibility models, which can be tricky to navigate in regulated industries. Additionally, the public cloud’s network performance depends on regional data centers, which may not always align with your customers’ locations.
Running your own data center on-premise gives you the highest degree of control. You manage the building, power infrastructure, physical access, hardware, and network — end to end. This model is often preferred in highly regulated sectors, or for legacy systems that aren’t cloud-friendly.
But control comes at a cost. Capital expenses are significant: hardware, racks, fire suppression, generators require ongoing maintenance. Scalability is limited by physical space and budget, and uptime depends entirely on your team’s ability to manage power, HVAC, and redundancy.
In practice, few companies commit to just one model. Hybrid strategies, combining colocation for high-performance or compliant workloads, cloud for elastic compute, and on-prem for legacy systems are increasingly the norm.
Still, colocation stands out when you need to balance predictable costs, control over infrastructure, and enterprise-grade reliability without shouldering the burden of running a facility. For many mid-market and enterprise organizations, it serves as a strategic middle ground in their infrastructure evolution.
There are several factors that businesses need to consider when looking for a colocation data center. These will vary based on the size of the business, the storage needs, along with factors like budget and physical location. Here’s what you need to consider:
Server racks are an essential part of IT systems for many businesses. They store and organize various equipment like servers, routers, or switches – think of these as IT-specific closets. Some data centers, known as retail colocation centers, only rent out these server rack spaces to businesses and host the server racks of many businesses at once. In these cases, businesses can bring their own servers or use ones provided by the data center.
With wholesale colocation data centers, though, all of the server racks and the space that houses them are rented by a single company. Businesses using wholesale centers typically supply their own servers and storage racks but pay for the space and utilities of the building. This exclusive setup is ideal for larger enterprises with significant IT needs.
Colocation data center pricing will vary from location to location. Smaller data centers in less populated areas will likely be cheaper as the data center’s building costs will be lower. However, for large data centers in big cities, the costs are higher in terms of the rent and utilities for the owners. These fees, thus, are passed onto businesses renting the space.
When looking at pricing, there are several areas to consider beyond the monthly or annual space rental. Always look to see if there is a setup fee involved, along with how operational costs are managed. If sharing the space with other businesses, it’s important to enquire how utility fees are divided among the different companies. In many cases, it’s based on the percentage of space they’re renting in the building. Ask for examples of these costs before signing any agreements to ensure these are factored into the budget.
Evaluate the different network providers available in the data center and if there’s any flexibility should the business want to bring in their own provider. Having a stable network is one of the best reasons for using a data center, so any provider must maintain this standard.
Understanding the network monitoring and management aspects is also vital, along with any security measures in place. These should be the most up-to-date options for protecting your data. But security also extends to physical security. Ask about what safeguards are in place around the building like surveillance, along with compliance certifications for regulated industries.
Providers with a strong track record of reliability and high levels of uptime are essential. Any unnecessary maintenance or emergency-related downtime creates unhappy customers and makes work impossible for the in-house team. This can become an expensive error if poor decisions are made when it comes to providers, eliminating the cost savings that come with using a third-party data center.
Consider the future needs of the business by projecting the space that might be required as the company grows. A small data center may be most cost-effective for now, but if the company grows quickly, it’s possible that outgrowing the original data center could happen sooner rather than later. This would then mean relocating again to a new facility.
Instead, if business growth is possible, consider using a larger data center that can accommodate any company growth goals with more space and power for the business’s IT infrastructure.
Businesses should feel confident in the data center provider they choose, including the staff working there. Instead of needing to send internal team members to check on something every time a problem comes up, businesses should be using data centers that provide educated and knowledgeable staff to support them.
These workers may be remote or located at the data center itself, with staff like engineers helping with emergencies or maintenance needs of the businesses within the data center.
For businesses considering colocation, understanding its financial impact goes beyond comparing monthly rent versus cloud fees. A proper ROI analysis considers setup costs, ongoing operational savings, business continuity improvements, and IT staffing reductions.
Here’s how to break it down.
Unlike the public cloud, colocation requires you to purchase and deploy your own servers, networking gear, and storage. These hardware investments are considered capital expenditures and often depreciate over a 3–5 year period.
Setup fees charged by the colocation provider like cross-connect fees, racking, and cabling, should also be factored in, although these are often one-time costs.
The core value of colocation lies in what you don’t have to manage:
These costs are bundled into your monthly colocation fee, which can range from $400 to $1,000 per cabinet per month depending on power usage, rack density, and facility tier. When compared to the expense of running an in-house data center or paying for high-performance workloads in the cloud, colocation can generate significant savings over time.
Colocation reduces the need for round-the-clock internal infrastructure staff. Most providers offer remote hands services, so simple tasks like rebooting a server or swapping a drive don’t require your team to be physically present.
Additionally, enterprise-grade colocation facilities are designed to deliver 99.999% uptime or better. Fewer outages mean lower costs due to lost productivity, SLA penalties, or data recovery efforts.
Unlike the cloud’s metered model, colocation provides fixed monthly billing. This predictability helps finance teams better manage cash flow and long-term planning. There are no surprises tied to data egress, CPU hours, or network transit.
To calculate your potential ROI:
Colocation may not always the cheapest option upfront, but over a multi-year horizon, it can offer superior cost-efficiency, reliability, and control. Organizations that perform a rigorous ROI analysis often find colocation delivers enterprise-grade infrastructure at a fraction of the cost of cloud or on-prem, especially when workloads are stable and compliance demands are high.
For organizations managing high-performance, high-compliance, or latency-sensitive workloads, colocation provides a compelling middle ground between owning a data center and relying entirely on the cloud. It’s about regaining control, hardening reliability, and positioning your infrastructure to scale without compromise.
The real value of colocation becomes clear when you map it to business goals: lowering long-term OpEx, meeting audit timelines, reducing the IT operations burden, or improving application performance by moving closer to users or partners.
If you’re evaluating colocation for the first time or transitioning from legacy infrastructure, your next step should be to define your infrastructure priorities and shortlist providers who can support them with transparency, technical rigor, and scalability.
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Sudipto Paul is an SEO content manager at G2. He’s been in SaaS content marketing for over five years, focusing on growing organic traffic through smart, data-driven SEO strategies. He holds an MBA from Liverpool John Moores University. You can find him on LinkedIn and say hi!
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