AWS Cost Optimization: How Cost Saving Works in Amazon Cloud

While one of your long-term business objectives may be cost optimization, it is virtually impossible to set such a complex process in motion without getting into the specifics. We have drafted this article to give you insights into how to save costs on AWS. Upon reading you will learn about:
  • the role of business value in cloud economics;
  • four pillars of the Cloud Value Framework;
  • AWS cost savings analysis and its purpose;
  • AWS cost reduction strategy;
  • AWS cost optimization principles.
AWS Cost Optimization – How Cost Saving Works

With cost optimization in mind, one can find it tempting to opt for the affordable pricing plans offered by traditional vendors and cloud providers. On the other hand, one can go deep and try to track, analyze and control the expenditure on databases and computing resources associated with developing and supporting the solution. One may consider or carry out migration as an opportunity to win both advantage on the market and cost savings. In all of these cases, the odds are that one will get confused and ultimately arrive at the same point one had embarked from: “Where do I start with optimizing our spend?”

Cost optimization is an outcome of properly conducted financial management, which is much more multidimensional than those individual steps likely to occur even to those who are competent in managing businesses. Creating a viable model which generates cost savings while improving performance, scalability, and agility is not straightforward. Taking into account the massive experience that Amazon has in the industry, one can gain benefits from AWS cost reduction strategies that have been developed to aid in cloud cost optimization on all possible levels.

Cloud economics

As a concept, cloud economics is essentially a discipline occupied with the matters of costs involved in cloud computing from an economic point of view. It may also be perceived as a study of business principles that prop up the merits and demerits that cloud computing may introduce to an organization. Cloud economics surpasses the scope of income, expenditure and cost cuts for it comprehensively covers all aspects of financial management in a developing cloud environment which can lead to cost reductions.

AWS Cost Optimization - Cloud Economics

This field encompasses two distinct areas: business value and cloud financial management, which nonetheless have a lot in common, and we will look into them in detail further.

Business value

This component of cloud economics embraces what promotes the clients’ businesses. It is the business value that aids in appreciating the contribution of AWS to an organization’s enhanced effectiveness and customer experience, among other factors.

While centering around the commonly expected concept of TCO, i.e. the total cost of ownership, the business value is made up by other numerous constituents that immediately affect business.

The AWS clients’ primary interests in financial respect may be taken up and analyzed, but the tangible value is only delivered in proofs of concept, reviews and other activities. The business value analysis is there to pave the way for further more significant and result-oriented processes, so it’s best kept prompt and effective to expose the organization to the actual value as soon as possible.

Cloud financial management

Another vital part of cloud economics, cloud financial management assists AWS clients in running the financial side of the cloud-based environment. It is occupied with helping to take full financial advantage of cooperating with AWS: from their initial steps towards migration or app design to long-term maintenance of the solutions in the cloud. To illustrate, financial benefits and risks are analyzed and weighed up for every phase of association with the cloud within the Migration Portfolio Assessment, besides the AWS APN Partners’ support for every area, including cloud economics.

Cloud financial management comprises four key areas:

  • Measurement and accountability – to guarantee cost transparency and accountability;
  • Cost optimization – to diagnose waste, and construct cloud-friendly highly scalable and cost-efficient architectures;
  • Planning and forecasting – to get insights into IT-associated costs, both current and prospective, in order to plan finance more accurately;
  • Cloud financial operations – to distribute and invest in staff, processes, and tools, supporting cloud financial management.

Cloud economics model example

The primary focus of the model is efficiency. Hence, the cloud economics model example provided further opens with the user’s needs calculation to cater for anticipated demand by forming appropriate capacity.

Cloud economics model

Capital investment

Upon the capacity measurement, clients can buy the cloud infrastructure, then deploy and maintain it at their own discretion. Infrastructure purchase is a financial influx as it is supposed to supply peak usage and such incremental increases are tied to the purchase cycles.

Cloud economics model – capital investment

Actual demand

It isn’t uncommon that actual demand differs from anticipated demand, as seen in the visuals.

Cloud economics model – actual demand

Provisioning infrastructure

Customers may request more provisioning just in case, while in practice it will turn out uncalled for. Another common example is underprovisioning due to the underestimation of users’ demand resulting in failure to deliver to the service level agreement (SLA), which deteriorates the performance quality and affects the company’s reputation.

AWS Cost Optimization – Cloud economics model – provisioning infrastructure

With AWS tools and services, businesses can be sure to be provisioned with only the necessary cloud infrastructure in conditions of fluctuating demand.

AWS Cost Optimization – Cloud economics model – provisioning infrastructure with AWS

Cloud Value Framework

The Cloud Value Framework was designed by AWS Cloud Economics out of the experience with more than a hundred clients and scrutiny of more than a thousand AWS case studies.

It helps businesses compile a thorough business case for cloud computing based on four essential criteria:

  • cost savings;
  • staff productivity;
  • operational resilience;
  • business agility.

Cost Savings

Conventional non-cloud-based data centers pose a number of complications and account for major resource waste when it comes to capacity planning. Firstly, they demand very precise calculations of likely technological demand; secondly, equipment is to be provided half a year before being put in operation; thirdly, databases require up to 50% overprovisioning to secure smooth functioning in peak demand.

Cloud allows organizations to invest exclusively in the computing resources they actually use since the cloud environments scale easily and swiftly to provide for the current demand, whether peak or low. With a best-suited match of supply and demand, cloud infrastructure reduces IT-related expenditure by preventing DB-associated capex and opex on hardware, software, networking, facilities operations, and upgrades as cloud services operate on a subscription model enabling cancelling at any time.

Despite the fact that cost optimization may be the principal reason for considering <ahref=”https://www.romexsoft.com/aws-cloud-migration/” target=”_blank” rel=”noopener”>cloud migration for the most part, the other three pillars of the Cloud Value Framework are just as important and are worthy of stressing in business value conversations.

Staff Productivity

This factor is a major contribution to the business value acquired through AWS. While a lot of staff is still occupied with maintaining data centers, the tasks connected with mundane operational issues are made unnecessary by cloud services. Computing competence now can be redistributed and devoted to more strategic jobs, such as designing new solutions or improving customer experience.

IT staff can also be exposed to the most modern but tried and tested software engineering approaches and processes available at AWS. Microservices, continuous integration/continuous deployment, automated testing, and fast (de-)provisioning are just a few examples of the tools which can crucially affect the solution’s time-to-market.

Operational resilience

One of the most significant financial leaks originates in unplanned outages. The cost of operational downtime of a critical app caused by either security threats or human error can amount to as much as $1 million hourly. Cloud services have been designed by AWS to prevent those losses by strengthening operational resilience in the following four areas.

To start with, AWS ensures infrastructure resilience against the basic threats of hardware failures of all origins, including interruptions in power supply by providing each compute instance with two independent power sources.

In the second place, AWS offers operation automation with AWS CloudFormation and AWS Service Catalog to exclude the possibility of human error. Those tools monitor the system’s operation to detect and handle emergent problems thus enhancing the ability to reach SLAs and ensuring smooth operation.

Thirdly, AWS supports and sets the highest security standards in the industry. With its certifications, AWS not only provides the most effective protection against all types of threats but also lays the basis for developing standard-compliant apps and solutions.

At last, there are approaches and processes developed with a view to minimizing the odds of software issues leading to failures. Apart from AWS CodeDeploy and AWS Code Pipeline for automating the continuous integration/continuous delivery workflow, AWS Managed Services ensure timely and proper provisioning and maintenance of the systems.

Business Agility

In a traditional on-premise IT model, innovation is hindered by additional temporal and financial resources for provisioning computing and technological bases, even in the case of a product launch failure.

By contrast, a cloud environment empowers developers with instantaneous access to agile scalable resources for experimenting with code which can be just as easily and quickly discarded if not needed. In such conditions, the risk of testing new technological opportunities or pioneering the market with new approaches is minimal, and so are the cost of failure and the waste of resources invested if compared to the on-premise infrastructures.

Cost savings analysis

While many businesses concentrate on the total cost of ownership, the AWS Cloud Value Framework, places the focus on AWS cost-saving measures while using AWS as compared to financing conventional IT resources.

With an AWS cost saving analysis, customers identify effectiveness improvement and cost reduction possibilities. AWS cost-saving tools take most of the focus due to the solid and precise numbers in the difference between the TCO for operating an on-premise environment compared to the AWS environment which is quite convincing. However, other pillars of the Cloud Value Framework, namely staff productivity, operational resilience, and business agility, change the financial investment landscape drastically.

Why cost savings analysis matters

As stated above, cost savings analysis renders insight into both the quality of performance and IT-associated expenditure of the actual on-premise environment in comparison to the plausible and reasonable data for operation with AWS.

As a rule, most customers prefer to carry out their cost analysis prior to associating with an AWS APN Partner. This, though, has a pitfall in the shape of the incomprehensive nature of the analysis which more often than not lacks vital cost factors and makes further extracted data skewed and not revealing of the current situation. With an AWS APN Partner, a more in-depth and thorough review is to be expected. In addition, the fact that uneven resource volume takes place in comparison between the cloud and on-premise infrastructure in terms of cores is also considered. To make it clearer, the AWS deployment calls for up to 60-80% of the cores required for legacy on-premise systems.

Lower costs with AWS

Subscription to AWS allows bypassing complex licensing for a variety of more than a hundred and a half services provided within different pricing models and tiers. Cloud services delivered by AWS enable alteration-sensitive payment exclusively for the resources you consume, without extra or subscription termination fees.

AWS cost optimization is based on:

  • consumption-based model;
  • AWS pricing models;
  • price reductions.

AWS Consumption-based model

AWS clientele can avoid cost waste generated by paying in advance for preordered IT resources and resort to paying for the resources that were actually provisioned and used with a consumption-based model, also known as the pay-as-you-go model.

The typical concern of those planning to launch a new product within the traditional infrastructure is a massive amount of time and funds invested into provisioning the hardware and backend systems during the preparatory phase before even commencing any work on the solution’s architecture in the first place. The time that is taken up at each point of equipping legacy infrastructures suffices to consider some of the provisioning outdated and draw up a list of new requirements. This accounts for frequent complaints about overprovisioning or underprovisioning.

Overprovision vs underprovision

What both of these have in common is resulting in cost waste and inefficiency. As to the differences between overprovision and underprovision, the former refers to the customers ordering more servers than they will eventually require, while the latter means a scarcity of capacity which leads to breaking the service level agreements.

Neither over- nor underprovision is a concern with AWS assistance. The services help align the clients’ infrastructure and financing with their IT needs at a given point in time even in varying demand, and so prevent overspending and inefficiency.

AWS pricing models

A major benefit of AWS pricing among other cloud providers is the pay-as-you-go pricing approach which not only allows more reasonable budgeting and adaptability but also smoother innovation. Whereas traditional vendors’ payment models compel the customer to retain the previously ordered capacities or data centers and enable upgrades or spare resource purchases only at the termination of the current prepaid period, with AWS you are entitled to modify the set of your servers whenever you need to.

Other than the consumption-based model, AWS offers the choice among several pricing models, according to the needs of the product:

  • the On-Demand Instances model enables ordering computing capacity by seconds or hours free of payments in advance or termination commitments;
  • Savings Plans offer adjustable pricing for AWS services for a year or three-year term, with a constant usage amount commitment;
  • the Spot Instances model refers to a pricing mechanism for purchasing spare computing capacity at discount rates without paying ahead of time.
  • the Reserved Instances model offers a discount for computing capacity of up 75% on condition of upfront payment. You can find out more details in the Optimizing costs with reservations section.

Price reduction

Amazon’s scale as the leading cloud provider on the market enables AWS cost-saving steps that will be translated into reduced pricing for AWS customers. As with everything, taking advantage of price cuts at AWS is so easy and quick that it can be characterized as automatic. Customers are immediately impacted by any discount with no effort on their part. For instance, a 30% decrease in price for Amazon S3 Glacier led to an instantaneous 30% reduction in the users’ bills at that time period. The cost savings received automatically at each price reduction at AWS contribute to investments into new features, projects or upgrades.

AWS reduce costs on a regular basis, however, this does not concern the Reserved Instances pricing model. As described in the previous section, Reserved Instances originally include a considerable discount making up for the probable upcoming price cuts. With a bit of analysis and planning, clients can make the most of the AWS consumption-based model, pricing models, and regular price cuts combined.

Cost reduction with AWS

If you are in search of concrete data to support the general sensible conclusions on the benefit that AWS can introduce to your organization, peruse the IDC independent research. The study backs up the facts of decreased operating costs and time-to-market with numbers.

The principal factor in the statistics to consider is the AWS migration payback period within which customers get a return on investment (ROI). Now, the length of a payback period may vary depending on the peculiarities of your organization’s IT needs with an average migration duration being 6 months with an ROI of 200%. Even for clients with a more extended migration term, and thus a payback period of up to 2 years, such as legacy apps of financial institutions, organizations expect a return of investment amounting to 50%.

What is less tangible to assess and put in figures in a study but nonetheless of equal importance, also appears in the IDC report as boosted technological and business agility. Apart from those competitive advantages, AWS allows utilizing the most modern but proven features of cloud-based environments which affect both the customers and their product and services’ end users.

Amazon flywheel

Among the AWS cost reduction best practices, we would like to point out the function of the Amazon flywheel. A flywheel is used to ensure the stability of a mechanical vehicle by accumulating energy while the vehicle accelerates, storing and supplying it when the vehicle slows down. Just like a physical flywheel gains momentum with time and movement, the Amazon Flywheel, alias Amazon Virtuous Cycle, helps you build up on your present assets to grow incrementally by exploiting your customer experience for driving traffic to the cloud platform and third-party sellers.

AWS Cost Optimization – Amazon Flywheel

Amazon Flywheel in the AWS ecosystem

The Amazon flywheel functions perfectly inside the Amazon environment as well, encapsulating the essence of the strategy for customers outside Amazon. Put simply, the flywheel is triggered by AWS cutting prices leading to more affordability, the latter, in turn, generates a bigger infrastructure scale, which allows a further decrease in prices for clients. This is how the Amazon Virtuous Cycle closes into a self-boosting loop.

AWS Cost Optimization – AWS Flywheel

Strictly financial aspect aside, AWS leverages the massive scope for supplying clients with the kinds of services that are either difficult to design, maintain and operate, or have a limited target audience and hence are commonsensical to be acquired from a provider rather than developed on-premises. AWS scale also makes such narrowly focused services available, inexpensive and user-friendly.

AWS cost optimization principles

The approaches and practices developed and probed by AWS were designed to have the best of both worlds. Customers are encouraged to take advantage of the most progressive tools for creating reliable and scalable solutions while optimizing their expenditure. With Amazon’s pricing models and price reduction methods presented previously, you can have the benefit of AWS’s numerous computing services simultaneously saving the resources to invest them in further innovation.

As stated by the AWS Well-Architected Framework, namely its Cost Optimization Pillar, resource management is a continuous effort, to be made at each point of a workload’s lifecycle and it by far exceeds the investment cost-effectiveness. Rather, it includes the following points:

  • Cloud Financial Management;
  • Expenditure and usage awareness;
  • Cost-effective resources;
  • Managing demand and resource supply;
  • Optimize over time.

Amazon has established these key principles for cost-efficient services usage:

  • Picking a suitable pricing model;
  • Matching capacity with demand;
  • Identifying resource waste.

How Romexsoft can help with AWS cost optimization

Cost optimization is an ongoing effort. You should regularly work with your finance and technology teams, review your architectural approach, and update your component selection.

Moreover, even projecting costs for a use case, such as web application hosting, can be challenging, because a solution typically uses multiple features across multiple AWS products, which in turn means there are more factors and purchase options to consider. So the best way to estimate costs is to examine the fundamental characteristics for each AWS product, estimate your usage for each characteristic, and then map that usage to the prices posted on their website.

You can use the AWS Pricing Calculator to estimate your monthly bill. The calculator provides a per-service cost breakdown, as well as an aggregate monthly estimate. You can also use the calculator to see an estimation and breakdown of costs for common solutions. Remember, you can get started with most AWS services at no cost using the AWS Free Tier.

Romexsoft strives to help you minimize cost if you’re going to build highly resilient, responsive, and adaptive deployments for your software from scratch or when you’re going to modernize those in your existing solutions.

AWS Cost Optimization FAQ

What is AWS economics?

AWS economics is a discipline that deals with the costs involved in cloud computing from an economic perspective. It covers the study of business principles that support the advantages and disadvantages that cloud computing may introduce to an organization. AWS economics surpasses the scope of income, expenditure, and cost cuts as it comprehensively covers all aspects of financial management in a developing cloud environment, which can lead to cost reductions.

How does AWS cloud cost reductions work?

AWS cloud cost reductions work by aligning the clients' infrastructure and financing with their IT needs at a given point in time, even in varying demand. This prevents overspending and inefficiency. AWS offers several pricing models, including the On-Demand Instances model, Savings Plans, the Spot Instances model, and the Reserved Instances model. AWS also regularly reduces costs, which translates into reduced pricing for AWS customers.

How can one estimate AWS costs?

Estimating AWS costs can be done by examining the fundamental characteristics for each AWS product, estimating your usage for each characteristic, and then mapping that usage to the prices posted on the AWS website. AWS provides a Pricing Calculator to estimate your monthly bill, providing a per-service cost breakdown, as well as an aggregate monthly estimate. The AWS Free Tier can also be used to get started with most AWS services at no cost.

What are AWS cost estimation tools?

AWS provides several tools for cost estimation. The AWS Pricing Calculator is a key tool that provides a per-service cost breakdown and an aggregate monthly estimate. It can be used to estimate costs for common solutions. The AWS Free Tier is another tool that allows users to get started with most AWS services at no cost. These tools help users to plan their AWS usage and manage their costs effectively.

Serhiy Kozlov
Serhiy Kozlov CEO/CTO at Romexsoft - AWS Partner in Cloud Migration & Application Modernization | AWS Certified Solutions Architect | LinkedIn Profile
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