Published 30 Oct 2023

Weighing the Costs and Returns of Colocation

By, Pulsant Experts

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As businesses continue to expand their digital footprints, the demand for efficient and secure data management solutions has never been greater.

Colocation, the practice of housing servers and IT infrastructure in third-party data centres, has emerged as an attractive option for enterprises seeking enhanced scalability, reliability, and cost-effectiveness.

However, before making a decision on colocation, it is vital to carefully assess the financial aspects associated with this service.

In this article, we’ll explore the various cost components of colocation and delve into the importance of evaluating returns on investment (ROI) to make informed decisions. 

Understanding cost factors in colocation

We’ll shortly take you through the various financial considerations of colocation, but first, it’s important to understand what the costs comprise of:

  • Rental costs: When considering colocation, one of the primary cost considerations is the rental fees charged by data centres. These costs can vary depending on the pricing models offered, such as per rack, per square foot, or per kilowatt. Understanding the implications of each model is crucial to accurately estimating expenses. 
  • Power and cooling costs: The power consumption of servers and other equipment, as well as the cooling requirements to maintain optimal operating temperatures, significantly impact overall expenses. Minimising power usage and implementing efficient cooling solutions can lead to substantial cost savings in the long run. 
  • Network connectivity costs: Effective data connectivity is vital for any business operating in a digital landscape. Colocation facilities often charge for network-related services and bandwidth usage, making it essential to assess your connectivity needs and potential costs. 
  • Additional costs: In addition to the primary expenses, consider supplementary costs, such as maintenance, setup, and upgrade fees. Understanding these hidden costs is essential for a comprehensive financial evaluation. 


Calculating the total cost of ownership (TCO) 

To make well-informed decisions regarding colocation, you should conduct a comprehensive evaluation of the total cost of ownership (TCO) associated with this service. The TCO provides a holistic view of all the expenses involved in adopting colocation solutions, helping you understand the financial implications for your business over the long term.

Upfront costs

The first aspect of calculating TCO involves accounting for all upfront costs incurred when transitioning to a colocation data centre. These upfront expenses may include: 

  • Migration and setup costs: Moving existing infrastructure to a colocation facility may involve one-time migration expenses, such as equipment relocation, system configuration, and network connectivity setup. 
  • Hardware and equipment: You’ll need to consider the initial investment required to purchase or lease servers, networking gear, storage devices, and other necessary equipment that will be hosted in the colocation facility. 
  • Compliance and security measures: Ensuring regulatory compliance and maintaining robust security measures may necessitate additional upfront investments in advanced security systems and compliance-related certifications. 
  • Cabling and infrastructure: Proper cabling and infrastructure setup are essential for seamless operations within the colocation environment, and their costs should be factored into the TCO.


Ongoing expenses

Beyond the initial investment, you also must account for the recurring expenses associated with operating within a colocation data centre. These ongoing costs include: 

  • Rental fees: Colocation service providers charge rental fees based on various pricing models, including per rack, per square foot, or per kilowatt. These charges contribute significantly to the recurring expenses. 
  • Power consumption: The continuous operation of servers and equipment requires a considerable amount of electricity, resulting in ongoing power consumption costs. 
  • Cooling requirements: To maintain optimal temperatures within the data centre, cooling systems are essential, leading to additional expenses related to cooling equipment and energy consumption. 
  • Network connectivity: Continuous data transfer and network usage generate connectivity costs, which can vary depending on the bandwidth requirements and usage volume. 
  • Support and maintenance: Consider ongoing support and maintenance costs for your hosted infrastructure to ensure smooth operations and timely troubleshooting. 


Cost advantages of colocation

By accurately assessing the TCO, you can compare the cost advantages of colocation against alternative infrastructure options. While on-premises data centres offer direct control over infrastructure, they come with higher capital expenditures and maintenance costs. Cloud solutions, on the other hand, often involve pay-as-you-go models, which may lead to unpredictable expenses for businesses with steady or predictable workloads. 

Colocation presents a balanced approach, offering access to professional data centres without the burden of managing infrastructure, resulting in potential cost savings. Additionally, you can often take advantage of economies of scale and shared resources in colocation facilities, further contributing to cost efficiency. 

Evaluating return on investment (ROI) 

Evaluating return on investment (ROI) is another crucial step if you’re considering colocation services. ROI provides a comprehensive understanding of the value colocation brings to an organisation, beyond just financial gains. Identifying key benefits and value propositions is vital for making a compelling case for colocation adoption. 

ROI serves as a critical metric in assessing the financial viability of any investment, and colocation is no exception. In the context of colocation services, ROI can be defined as the net benefit gained from the investment compared to the total cost incurred over a specific period.

In the context of colocation, this is a reflection of how the benefits derived from the service outweigh the associated costs. These benefits extend beyond mere financial gains and can include enhanced performance, increased reliability, improved security, and the ability to focus on core business activities without the burden of managing infrastructure. 

Identifying key benefits and value propositions 

To assess ROI accurately, you’ll need to identify and quantify the key benefits and value propositions offered by colocation. These may include: 

  • Enhanced scalability: Colocation data centres provide the flexibility to easily scale infrastructure resources as your business needs grow. The ability to expand without significant upfront costs can have a positive impact on your ROI. 
  • Improved reliability: Reputable colocation facilities offer advanced redundancy measures, ensuring high levels of uptime and minimal downtime. Reduced downtime can translate into increased productivity and revenue, positively affecting ROI. 
  • Heightened security: Data centres implement robust security measures, protecting valuable assets from potential threats. Avoiding costly security breaches or data loss can significantly contribute to ROI. 
  • Access to professional expertise: By leveraging the expertise of colocation providers, you can tap into specialised support and maintenance services, allowing your IT team to focus on strategic tasks rather than routine management.


Factors influencing cost and ROI 

When evaluating the cost and return on investment (ROI) of colocation services, you should take into account various factors that can significantly impact the overall financial outcomes. Understanding these factors is essential for making informed decisions and ensuring that colocation aligns with the specific needs and goals of your organisation.

Geographical location

The geographical location of the chosen colocation facility can have a substantial impact on costs and ROI. Data centres located in prime urban areas or regions with high demand for data services may command higher rental charges due to increased operating expenses and real estate costs. However, these facilities might offer better connectivity options, access to reliable power grids, and proximity to target markets, providing potential value additions that can positively affect ROI. 

On the other hand, data centres situated in less expensive locations may offer more affordable rental rates, but their connectivity and accessibility might not be as robust, potentially impacting the quality of service and overall business performance. 

Scalability and future growth

As your business evolves, its data management needs invariably grow. When assessing colocation options, it is crucial to consider the scalability of the facility. A colocation service provider that can accommodate the future expansion of the business's IT infrastructure is more likely to yield higher ROI. 

The ability to easily scale up or down resources without incurring significant costs for hardware upgrades or data migration ensures that you can adapt to changing demands efficiently. A scalable colocation solution aligns with the long-term growth strategy of your organisation, avoiding the need for frequent relocations or costly expansions. 

Industry-specific requirements

Different industries have distinct data management requirements and regulatory obligations. Adapting colocation services to cater to industry-specific compliance standards can influence both costs and ROI.

For example, industries dealing with sensitive data, such as healthcare or finance, may require enhanced security measures, data encryption, and strict adherence to privacy regulations. Implementing these industry-specific requirements may involve additional investments, but they are critical for ensuring data integrity and legal compliance. 

Conversely, industries with less stringent data regulations may have more flexibility in choosing colocation options with lower setup costs, leading to potentially higher ROI. 

Cost comparison: Colocation vs. on-premises data centres 

The cost comparison between colocation and on-premises data centres is a critical step in determining the most suitable data management solution for any business.

While on-premises data centres offer direct control, they entail higher capital expenditures and ongoing maintenance costs. On the other hand, colocation provides access to professional facilities and resources without the burden of infrastructure management. 

Let’s take a closer look at the cost considerations and more.

On-premise: Direct control with higher capital expenditure 

On-premises data centres offer direct control over your IT infrastructure. Companies can design and customise their data centre to meet specific requirements and have complete ownership of the hardware and networking components. This level of control can be advantageous if your business has highly specialised needs or stringent security regulations. 

However, building and maintaining an on-premises data centre come with significant capital expenditure and ongoing operational costs. Initial investments include purchasing servers, networking equipment, storage devices, cooling systems, and physical infrastructure like power backup and security measures. These upfront costs can strain budgets, particularly for small to medium-sized enterprises (SMEs). 

Moreover, the expenses do not end with the initial setup. On-premises data centres demand ongoing maintenance and upgrades, involving additional expenses for cooling, energy, equipment replacement, system updates, and skilled IT personnel to manage and troubleshoot issues. 

Colocation: Access to professional facilities without infrastructure management 

Colocation services, on the other hand, offer you the opportunity to host your IT infrastructure in third-party data centres. Instead of managing your data centre, you can leverage the expertise of colocation providers who maintain the facilities and ensure robust security and reliability. 

By opting for colocation, you can avoid the burden of significant capital expenditures on data centre construction and equipment. Instead, you pay rental fees to the colocation provider based on your chosen pricing model (per rack, per square foot, or per kilowatt), leading to more predictable and manageable costs. 

Colocation data centres are equipped with state-of-the-art facilities, redundant power and cooling systems, advanced security measures, and high-speed network connectivity. These professional-grade resources provide you with the reliability and performance needed to support critical business operations and meet customer demands. 

Considering your options

When comparing the cost differences between colocation and on-premises data centres, consider the following:

  • Scale and capacity: If your business has varying workloads and scalability needs, colocation can be a more cost-effective choice, as you can scale resources as required without investing in excess capacity. 
  • Business growth: If you’re a rapidly expanding business, colocation can offer agility and cost advantages, ensuring infrastructure can keep pace with growth without major upfront investments. 
  • Control and compliance: If you’re operating in an industry with stringent data regulations and specific compliance requirements, you may prioritise on-premises data centres to have complete control over data security and governance. 
  • Financial considerations: Smaller businesses or startups with limited capital may find colocation more financially viable, as it allows them to access top-tier facilities without hefty upfront expenses.


Best practices for cost optimisation 

To capitalise on the advantages of colocation and ensure a cost-effective data management strategy, you can adopt the following best practices for cost optimisation.

Strategic capacity planning

Forecasting future capacity requirements is essential for avoiding overprovisioning and unnecessary expenses. By carefully assessing your current and projected data storage, processing, and networking needs, you can accurately determine the amount of space, power, and cooling resources your business will require within the colocation facility.

Strategic capacity planning allows you to scale your infrastructure in line with anticipated growth, ensuring that you only pay for the resources you genuinely need. This proactive approach helps prevent overspending on excessive resources while maintaining the flexibility to accommodate increased demands when necessary.


Implementing green technologies and energy-saving measures is not only environmentally responsible but also financially beneficial. Colocation facilities consume a substantial amount of electricity to power servers, cooling systems, and other equipment. By adopting energy-efficient practices, businesses can significantly reduce power consumption and associated costs.

This can involve the use of energy-efficient servers and networking equipment, adopting advanced cooling technologies, and implementing server virtualisation to consolidate workloads and minimise energy waste. Investing in renewable energy sources or partnering with colocation providers that prioritise sustainable practices can further enhance energy efficiency and contribute to cost savings.

Regular audits

Periodic audits of colocation expenses and resource usage are crucial for identifying potential areas of cost reduction and optimising resource allocation. By conducting regular assessments, you can gain insights into your data centre operations, resource utilisation, and spending patterns.

Audits can reveal areas of inefficiency, such as underutilised servers or cooling systems operating at suboptimal efficiency. Armed with this insight, you can make data-driven decisions to streamline operations, eliminate unnecessary expenses, and fine-tune resource allocation.

In addition to financial audits, you should also consider security and compliance audits to ensure that data protection measures are up to date and regulatory requirements are met. Non-compliance can lead to costly fines and penalties, making regular audits an essential aspect of cost optimisation.


Conclusion: Making an informed decision

Weighing the costs and returns of colocation is a critical step for businesses seeking efficient and reliable data management solutions. By thoroughly understanding the various cost components, evaluating ROI, and considering factors influencing cost and returns, you can make informed decisions.

As technology continues to advance, colocation is likely to remain a compelling option for businesses seeking scalability and cost-effectiveness. It is therefore essential to partner with reputable colocation providers like Pulsant, who can offer expert guidance and tailor solutions to meet specific needs.

So, before making any decisions, consider the financial implications alongside the benefits to ensure the best outcome for your business. Contact Pulsant today for more information on colocation services and how they can benefit your business.