What is Cloud Cost Optimization?

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Are you dissatisfied with your organization’s approach to managing SaaS resources? Are you concerned that your resources are wasted and that you can’t pinpoint your cloud costs?

With the booming demand for fast, agile, and scalable SaaS solutions, companies increasingly rely on cloud-powered services to fuel their operations. However, the benefits of using cloud-based tools come with a significant caveat: unnecessary resource waste.

But don’t worry! You can manage your costs effectively by taking steps toward cloud cost optimization. In this blog, we’ll explore cloud cost optimization, the various costs associated with the cloud, the factors influencing these costs, and strategies to help you minimize avoidable expenses.

Let’s start by understanding what cloud cost optimization is.

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What is cloud cost optimization?

Cloud cost optimization is all about saving money when using cloud services. It refers to the protocols, policies, and tools companies use to continuously improve their cloud computing experience and reduce cloud SaaS spending.

This process includes checking how much cloud services are being used, finding ways to cut costs, and ensuring every dollar spent is worth it. Simply put, it’s about getting the best value from your cloud services while spending less.

This practice allows companies to generate more ROI through their cloud investments, and that too within budget constraints.

What constitutes cloud costs?

Cloud costs consist of all the spending an organization must consider to utilize cloud computing services fully. At first, cloud costs can seem overwhelming. However, breaking them down into components simplifies the concept.

Check this table to understand the different components associated with cloud costs.

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As more companies move their workloads to the cloud, cloud costs become a more prominent line item on budgets. Most industries worldwide have increased their cloud budget, increasing cloud spend.

The software industry spends 18%, financial services spend 10%, and retail and commerce spend 7%. Now, we understand why optimizing cloud costs is essential.

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Why is it necessary for you to optimize cloud costs?

Cloud technology costs over $12 million annually for about 37% of companies. In 2024, global spending on open-source cloud services is expected to increase by 20.4%, reaching $675.4 billion. Thus, it is important to build a culture that focuses on avoiding overspending on the cloud.

Here are some of the key reasons why cloud cost optimization is necessary:

1. Cost efficiency: Optimizing cloud costs helps utilize resources more effectively, reduce unnecessary spending, and maximize the value of each investment. This leads to smarter budgeting and resource allocation.

2. Increases ROI: Optimizing cloud costs by right-sizing licenses and consolidating vendors leads to better returns on cloud investments. Organizations can get more value from what they spend on the cloud, allowing for reinvestment in growth.

“Growth and comfort do not coexist.”

– Ginni Rometty

4. Re-align usage to evolving business needs: It extends flexibility to up or down-scale services and spending based on your business’s fluctuating requirements. This adaptability ensures you’re only paying for what you need.

5. Controlled innovation: Optimizing cloud costs frees up the budget for more innovation while minimizing waste and controlling overall costs. This enables teams to focus on developing new ideas and solutions.

6. Improved margins and profitability: Lower cloud costs directly boost profits by cutting unnecessary costs. This is vital, especially for organizations heavily reliant on cloud services, allowing saved funds to fuel growth and innovation.

7. Competitive advantage: Efficient public cloud utilization can be competitive, especially for digital businesses with mostly variable spending. As cloud usage skyrockets in modern IT landscapes, optimizing costs becomes pivotal for productivity, prudent spending, and efficient resource alignment.

Now, a multitude of factors can influence your company’s cloud costs. Let’s take a look at it.

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9 Factors that influence cloud costs

Redundant cloud costs can only be controlled once you understand the underlying factors associated with them. Different things can influence cloud costs; however, here are the nine most critical contributing factors:

1. Usage patterns and spikes in demand

Predicting cloud service usage patterns in organizations is complicated, and the dynamic nature of cloud services makes it challenging. Companies often experience resource demand fluctuations, leading to variable costs.

Peaks in demand result in the automatic provisioning of extra resources to maintain performance, inadvertently causing a surge in cloud expenses. Effective cloud cost optimization involves analyzing these usage patterns and implementing auto-scaling mechanisms to optimize resource allocation and align with actual demand.

2. Hidden egress fees associated with cloud services

Almost all cloud service providers highlight competitive pricing for ingress. However, the egress (data leaving the cloud) fee is usually a hidden cost that catches companies off guard.

Moving data out of the cloud incurs additional charges, and the costs associated with egress fluctuate based on the destination. Awareness of these fees is imperative for accurate cost estimation and leveraging content delivery networks (CDNs).

It also helps optimize data transfer and explore cost-effective data storage solutions.

3. Storage and compute costs

Storage and computing resources are the backbone of any organization’s cloud infrastructure. The costs associated with these two have a significant impact on overall costs.

Factors like instance sizes, uptime, attached storage volumes, load balancer usage, etc., directly impact spending as they are usage-based.

Critical cost management strategies include understanding the connection between different storage classes, choosing the most appropriate storage tiers, and optimizing computing resources by right-sizing.

Regularly assessing and adjusting storage and compute configurations based on actual needs ensures optimal performance without additional expenditure.

4. Unused or underutilized resources

One of the common challenges in cloud cost optimization is the presence of unused or underutilized resources. Companies may provision resources for specific projects or peak demand periods but fail to de-provision them when they are no longer needed.

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This results in ongoing costs for idle resources. Regular monitoring, automated scaling, and implementing resource lifecycle policies are vital to identify and mitigate the impact of unused or underutilized resources on cloud expenses.

Using cloud cost analytics, identify and eliminate unused resources, helping with cost optimization in the cloud. Enhancing utilization levels by autoscaling or rescheduling workflows also optimizes cloud costs.

5. Geographic locations & vendor pricing models

Cloud service providers provide multiple services with various pricing models and regional pricing variations. Understanding the pricing details of each service, choosing the right pricing model (e.g., reserved instances or pay-as-you-go), and becoming aware of the geographical location of resources significantly affect costs.

Choosing a specific region for deploying cloud resources also impacts pricing, as costs vary based on the data center's location. Strategic planning that aligns with the organization's needs and cost considerations is critical when navigating vendor pricing structures and geographic factors.

6. Resource type & instance size

Different types of cloud resources—such as standard instances versus high-performance instances—have varying costs. Choosing the right resource type and instance size is crucial to avoid overspending. For example, a high-performance instance may be necessary for demanding applications, while standard instances might suffice for less intensive workloads.

Regularly reviewing your resource allocation helps ensure you’re not over-provisioned for your specific needs. This means you can optimize performance without incurring unnecessary costs. By right-sizing your resources, you can maintain efficiency and save money.

7. Data transfer

Transferring data between cloud services or from the cloud to on-premises systems can lead to significant costs. While incoming data (ingress) is usually free, charges for outgoing data (egress) can quickly add up, especially if large volumes are involved.

To manage these costs effectively, it’s essential to understand the data transfer rates associated with your cloud provider. You can optimize data movement by aggregating transfers or leveraging regional resources, which can help reduce egress charges. This strategy can lead to substantial savings and improve overall cost efficiency.

8. Reserved vs. on-demand instances

When choosing cloud instances, you typically have two options: reserved instances and on-demand instances. Reserved instances offer lower rates in exchange for long-term commitments, while on-demand instances provide flexibility but can be more expensive.

Evaluating your usage patterns and predicting your future needs is key to making the right choice. Scheduled instances can lead to significant cost savings if your workloads are predictable. However, on-demand instances might be more suitable if your demands fluctuate frequently. They allow you to scale resources as needed without long-term commitments.

9. Add-ons and services

Cloud providers often offer additional services and add-ons, such as advanced security features, monitoring tools, and performance enhancements. While these can add value, they can also increase costs if you’re not careful.

“The degree to which a company can utilize habit-forming technologies will increasingly decide which products succeed.”

 —  Nir Eyal, Writer, TC, Forbes, NirandFar

It’s important to be selective about which add-ons you truly need. Regularly assessing the necessity and usage of these services can help you ensure you’re not paying for features that don’t benefit your organization significantly. This practice allows you to manage your expenses more effectively using valuable cloud capabilities.

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Optimizing cloud costs with CloudEagle.ai

CloudEagle.ai is a SaaS management and procurement platform that can help organizations optimize their cloud costs. By integrating with your internal systems, CloudEagle.ai will get access to your cloud portfolio and provide complete visibility on usage, spend, contracts, bills, licenses, etc.

Using CloudEagle.ai, you can optimize your cloud costs and save on spend. Here’s a quick rundown of how this platform can help you:

1. Eliminate redundant apps and shadow IT

Managing your SaaS stack means eliminating duplicate apps that do the same thing. CloudEagle.ai's categorization engine helps you find these overlapping apps quickly to reduce clutter, streamline workflows, and optimize your tech stack.

Shadow IT is when employees use unauthorized software that the IT department does not approve. This can lead to security risks and unexpected costs, especially when free apps start charging.

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CloudEagle.ai sends alerts when it detects these unauthorized apps, allowing companies to act quickly before becoming problematic. This helps reduce security risks and unnecessary costs and ensures that organizations only pay for value-added apps.

Check out this inspiring case study, in which Heath Ceramics' IT and Finance team achieved 100% SaaS visibility and spending insights using CloudEagle.ai.

2. Get feature-level usage data

Logins alone do not provide a complete picture of how an app is being used. CloudEagle.ai enables you to dive deeper into each app's feature-level usage. By understanding which features are being utilized, companies can determine whether they are using the app to its full potential.

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For example, if a user is not hosting meetings or their meetings last less than 40 minutes, they could be moved to a free or lower-tier license, saving costs. This granular level of data allows organizations to optimize app usage and ensure that the features being paid for are necessary for their operations.

Check out this testimonial from Lucas Dermois, IT Systems Architect at Iceye. He shares how CloudEagle’s insights helped them find missing contracts, connect with vendors, and review past deals, allowing Iceye to sign contracts below market price and achieve significant savings.

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3. Recycle SaaS licenses

Unused or forgotten SaaS licenses can lead to unnecessary spending. When employees leave a company, their supervisors often forget to cancel their software licenses.

CloudEagle.ai solves this by integrating with your HR system to revoke licenses when an employee exits automatically. This proactive approach prevents unused licenses from piling up, saving companies from the cost of continually purchasing new ones.

Additionally, CloudEagle.ai allows organizations to upgrade or downgrade licenses based on actual usage, ensuring that users have the right level of access for their needs. Unused licenses can also be reassigned to new employees through license harvesting workflows, optimizing license utilization and minimizing the need for extra purchases.

4. Rationalize your SaaS stack

A disorganized SaaS stack, with duplicate or unused apps, can significantly increase costs. CloudEagle.ai provides an automated solution to rationalize your SaaS stack by organizing and categorizing all apps in one place.

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The platform delivers feature-level insights through direct API integrations, allowing companies to decide which apps to eliminate and which to consolidate. By removing redundant apps and consolidating those that provide overlapping functionality, organizations can cut unnecessary SaaS costs and focus on the apps that genuinely add value.

5. Categorize and allocate resources with ease

Managing a large SaaS stack can be challenging, especially ensuring that the right apps go to the right departments. CloudEagle.ai’s categorization engine makes this easy by automatically organizing apps based on their functions. Whether for marketing, product, or IT, CloudEagle.ai efficiently categorizes each app, helping organizations track usage by department.

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Additionally, CloudEagle.ai simplifies the search for SaaS solutions by allowing users to describe their needs in plain English. This user-friendly approach means organizations can quickly find relevant vendors without wading through complicated jargon, making choosing the right software for their needs easier.

6. Vendor relationshiop nanhgemebent

The SaaS market is always changing, with new and innovative vendors joining regularly. CloudEagle.ai helps companies stay updated on these new vendors and their products, ensuring they don't miss out on useful solutions to improve their operations.

By keeping up with the latest tools, organizations can become more efficient or save money by switching to better options. Getting input from peers is very helpful when choosing SaaS tools.

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For instance, CloudEagle.ai allows users to see their peers' software and connect with them for insights. This feedback speeds up decision-making and helps companies choose the right vendor.

“Everyone else is your boss —  all of your employees, customers, partners, users, media are your boss.”

—  Phil Libin, Founder & CEO, Evernote

By learning from others, organizations can avoid common mistakes and feel more confident in their software choices, making management approval easier. However, searching through many review sites for SaaS solutions can take time and be overwhelming.

Nowports achieves 34% savings with CloudEagle.ai's effective negotiation. Read the full success story.

7. Procurement workflows

CloudEagle.ai’s automated procurement workflows help organizations save money and simplify software procurement. Using a single dashboard, they can create custom forms and no-code workflows, making it easy to track and approve purchase requests in real time. This process reduces delays, speeds up procurement, and reduces manual work.

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With Slack integration, users can easily raise and approve requests and receive updates directly in their communication tools. Custom forms direct requests to the right person, minimizing errors. Automatic updates via email, Slack, or Teams keep everyone informed, eliminating the need for constant follow-ups.

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To learn more about optimizing SaaS costs, streamlining software sourcing, and aligning departments and resources for cost efficiency, listen to Kalyan Gummadam, Head of Indirect Procurement at Matterport, in this podcast.

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Conclusion

Organizations should focus on achieving visibility, rightsizing resources, optimizing storage, and integrating cloud-native services to manage cloud costs effectively. To optimize costs, proactively tackle hidden charges and usage patterns, streamline resources, eliminate unused assets, and understand pricing models.

However, this isn't a quick fix. Understanding and optimizing your organization's cloud costs properly takes time and effort.

“You need persistence because everything takes longer than you expect.”  

—  Paul Graham, Co-founder, Y-combinator

If you need help managing your organization’s cloud costs and optimizing your resources, choose a SaaS management tool with advanced cloud optimization features. In this scenario, CloudEagle.ai can help you streamline your software usage and minimize cloud costs.

Schedule a demo with CloudEagle.ai and learn how to optimize your cloud costs and improve resource management.

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