Well if you're talking about RENTING a server. Host usually have multiple server boxes around locations (offices) around the region. You chose what server you want to pay for, memory, amount of players, and region. Once you purchase you'll be able to access your server @ their systems. So basically you pay for them to host it without much lag if you don't have a computer that can port-forward or hamachi a minecraft server. (Due to demands of memory)
On a side note.
I used to host from Beastnode.com and the quality was great. I definitely recommend.
Also, If you're talking about VPS', I have no idea how those work.