Colocation providers may offer two pricing and packaging models to sell similar products and capabilities. In both models, customers purchase space, power and services. However, the method of purchase differs.

In a retail model, customers purchase a small quantity of space and power, usually by the rack or a fraction of a rack. The colocation provider standardizes contracts, pricing and capabilities — the cost and complexity of delivering to a customer’s precise requirements are not justified, considering the relatively small contract value.

In a wholesale model, customers purchase a significantly larger quantity of space and power, typically at least a dedicated, enclosed suite of white space. Due to the size of these contracts, colocation providers need to be flexible in meeting customer needs, even potentially building new facilities to accommodate their requirements. The colocation provider negotiates price and terms, and customers often prefer to pay for actual power consumption rather than be billed on maximum capacity. A metered model allows the customer to scale power usage in response to changing demands.

A colocation provider may focus on a particular market by offering only a retail or wholesale model, or the provider may offer both to broaden its appeal. The terms “wholesale” and “retail” colocation more accurately describe the pricing and packaging models used by colocation providers rather than the type of customer.

Table 1 Key differences between retail and wholesale colocation providers

Retail colocation deals typically have higher gross margins in percentage terms, but the volume of sales is lower. Most colocation providers would rather sell wholesale contracts because they offer higher revenues through larger volumes of sales, despite having lower gross margins. As wholesale colocations are better prospects, retail customers are more likely to experience cost rises at renewal than wholesale customers.

Retail colocation pricing model

Retail terms are designed to be simple and predictable. Customers are typically charged a fixed fee based on the maximum power capacity supplied to equipment and the space used. This fee covers both the repayment of fixed costs, and the variable costs associated with IT power and cooling. The fixed fee bundles all these elements together, so customers have no visibility into these individual components — but they benefit from predictable pricing.

In retail colocation, the facilities are already available, so capital costs are recovered across all retail customers through standard pricing. If a customer exceeds their allotted maximum power capacity, they risk triggering a breaker and potentially powering down their IT equipment. Some colocation providers monitor for overages and warn customers that they need to increase their capacity before an outage occurs.

Customers are likely to purchase more power capacity than they need to prevent these outages. As a result, some colocation providers may deliberately oversubscribe power consumption to reduce their power costs and increase their profit margins. There are operational and reputational risks if oversubscription causes service degradation or outages.

Some colocation providers also meter power, charging a fee based on IT usage, which factors in the repayment of capital, IT and cooling costs, as well as a profit margin. Those with metering enabled may charge customers for usage exceeding maximum capacity, typically at a higher rate.

Can a colocation provider increase prices during a contract term? Occasionally, but only as a last resort — such as if power costs increase significantly. This possibility will be stipulated in the contract as an emergency or force majeure measure.

Usually, an internet connection is included. However, data transfer over that connection may be metered or bundled into a fixed cost package. Customers have the option to purchase cross-connects linking their infrastructure to third-party communications providers, including on-ramps to cloud providers.

Wholesale colocation pricing model

Wholesale colocation pricing is designed to offer customers the flexibility to utilize their capacity as they choose. Because terms are customized, pricing models will vary from customer to customer.

Some customers may prefer to pay for a fixed capacity of total power, regardless of whether the power is used or not. In this model, both IT power and cooling costs are factored into the price.

Other customers may prefer a more granular approach, with multiple charging components:

• Fixed fee per unit of space/rack based on maximum power capacity and is designed to cover the colocation provider’s fixed costs, while including a profit margin.
• Variable IT power costs are passed directly from the electricity supplier to the customer, metered in kilowatts (kW). Customers bear the full cost of price fluctuations, which can change rapidly depending on grid conditions.
• To account for variable cooling costs, power costs may be calculated by multiplying actual power usage by an agreed design PUE to create an "additional power" fee. This figure may also be multiplied by a "utilization factor" to reflect cases where a customer is using only a small fraction of the data hall (and therefore impacting overall efficiency).

Some customers may prefer a blended model of both a fixed element for baseline capacity and a variable charge for consumption above the baseline. Redundant feeds are also likely to impact cost. If new data halls need to be constructed, these costs may be passed on to the customers directly, or some capital may be recovered through a higher fixed rack fee.

Alternatively, for long-term deployments, customers may opt for either a “build-to-suit” or “powered shell” arrangement. In a build-to-suit model, the colocation provider designs and constructs the facility —including power, cooling and layout — to the customer’s exact specifications. The space is then leased back to the customer, typically under a long-term agreement exceeding a decade.

In a powered shell setup, the provider delivers a completed exterior building with core infrastructure, such as utility power and network access. The customer is then responsible for outfitting the interior (racks, cooling, electrical systems) to suit their operational needs.

Most customers using wholesale colocation providers will need to implement cross-connects to third-party connectivity and network providers hosted in meet-me rooms. They may also need to arrange the construction of new capacity into the facility with the colocation provider and suppliers.

Hyperscalers are an excellent prospect for wholesale colocation, given their significant scale. However, their limited numbers and strong market power enable them to negotiate lower margins from colocation providers.

Table 2 Pricing models used in retail and wholesale colocation