Colocation means that you share a server hall with lots of other companies.
These data centres lower the cost for the server and you get much better internet connections and security.
These server halls have have fire protection systems, air conditioning to keep the temperature down, good electrical systems etc. The colocation serivice provider usually has really good network connectivity so the traffic will be increased to your site.
Most of the providers also have good physical protection with video surveillance and guards.
The colocation service is perfect for companies the want to use their own servers for their websites. Lets say that you have a home built web shop that require a lot of special installations on the server to work. Colocation is perfect for you.