Cloud Cost Management: A Complete Guide

Written by Keren Shmuely

What Is Cloud Cost Management?

Cloud cost management is an organizational practice that helps businesses understand and manage the costs and requirements associated with cloud technologies. Its main goal is to find more efficient cost-effective ways to use the cloud.

Cloud infrastructure is becoming more complex and as a result, cloud costs are difficult to track, visualize, and predict. The pay-as-you-go pricing model used by most public cloud providers makes this problem worse, because spend can fluctuate dramatically depending on the actual resources being used.

Properly monitoring and management of cloud usage is critical, but in many cases, will be difficult to achieve. When decisions are distributed across the organization and individuals can launch and incur costs on cloud services with little or no responsibility, costs can quickly get out of control. A cloud cost management strategy helps businesses create a framework for budgeting and shared responsibility, to ensure that cloud resources are used sensibly and with the appropriate controls.

In this article:

The Importance of Cloud Cost Management

Cloud computing offers major advantages, including rapid scalability and the elimination of upfront capital investments. Cloud solutions allow DevOps and IT teams to start using services quickly and easily, but they also introduce a risk of unexpected costs that exceed your planned budget. You can implement a cloud cost management approach to help plan your organization’s future cloud service consumption and costs. 

Most companies today use multi-cloud deployments, making it especially important to establish an effective cost management strategy for the multi-cloud. This involves monitoring and comparing the costs of different cloud providers. Having deep visibility into your cloud usage and costs is essential for enforcing accountability across the organization, improving the performance of cloud-based technologies, and informing decisions about the workloads running in each cloud environment.

Cloud cost management also helps you optimize resources to make the most of them. Public cloud providers usually offer a cost management tool to help you achieve this. However, specialized third-party cost management solutions offer greater visibility and insights into cloud costs, allowing you to control spending and implement good governance practices.

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Cloud Cost Management vs. Cloud Cost Optimization

Cloud cost management involves allocating and tracking cloud resources to analyze and report cloud spending. Cloud cost optimization takes these insights to help you understand how to minimize costs while maximizing business value. 

Cloud cost optimization is not limited to cost savings—aligning costs with business goals is also important. When revenue increases, increasing costs might not be an issue.

Cloud cost growth often relates to indicators such as introducing new customers and launching new features. However, these activities usually bring higher returns. In software-as-a-service (SaaS) environments, higher revenues often lead to higher profit margins and help attract investors. 

Learn more in our detailed guide to cloud cost optimization

Cloud Cost Models

Given the volatility of supply and demand, cloud offerings usually have dynamic cost models. A cloud cost model can be time-based, cost-based, or auction-based, depending on several factors. 

The three main cloud pricing approaches are value-based, market-based, and fact-based. Demand drives value-based costing, supply drives fact-based costing, and supply-demand balance drives market-based costing.

Many people are unaware of the many unique pricing structures available with cloud computing. Understanding the different pricing options is important for models choosing the right cloud cost model and determining how the CSP bills you. 

Three main factors determine the cost of cloud computing services.

  • Compute—most cloud service providers (CSPs) offer different compute instances with different memory and CPU features. They can also use specialized hardware such as high-speed networking and graphics acceleration. You pay based on each instance’s number, type, and usage duration.
  • Network—most CSPs charge based on the amount of data transferred to or from the cloud service. Additional fees for virtualized network services like static IP addresses, gateways, and load balancers may apply.
  • Storage—CSPs offer storage-as-a-service options. For example, an elastic storage service may charge monthly for each GB of storage used. You pay for the entire storage volume of a managed storage service, such as a managed disk attached to a compute instance.

Here is an overview of the main cloud cost models.

Upfront Payment and Static Savings Plans

A flat rate or upfront payment is a good option if you know your customers’ level of demand in advance. Most cloud vendors are willing to negotiate discounted upfront rates if you commit to a certain usage amount or contract term.

Large enterprises that manage to negotiate discounts may choose a fixed payment method called Reserved Instances (RIs). They commit long-term to purchase a specified number of instances, guaranteeing a static service level at a fixed price.

Although the initial cost is high, the upfront payment model is the most predictable and transparent cloud cost option. If you can afford to spend a large part of your budget at once, you may save money in the long term. Learn more in our detailed guide to cloud cost savings (coming soon)

Pay-per-use Plans for Dynamic Cloud Services

Paying a fixed price for cloud computing resources is not always viable if future demands are uncertain. You don’t want to overpay for resources you might not need.

A pay-per-use plan may be better if your business has evolving demands. If your organization is likely to under-utilize cloud services for your customers, it makes more sense to pay for the resources you use rather than forecasting usage in advance. 

Although you pay more per instance and miss out on a savings plan’s discounts, a pay-as-you-go plan may deliver better overall savings. Because the charges match your real-time demands and usage, you can avoid paying for unused reserved instances. 

Spot Instances for Cheaper, Short-Term Services

You can achieve a great ROI using spot instances if you prioritize cost savings over ensuring reliable access to the cloud services. If the cloud service provider has spare computing capacity (i.e., instances not used by any customer), it can sell the limited availability to the highest bidder at a significant discount.

The drawback of this option is that it is not reliable or predictable. The service may be modified or discontinued according to the available capacity.

Learn more in our detailed guide to: 

  • Cloud cost models (coming soon)
  • Cloud computing costs (coming soon)

What Are the Challenges of Cloud Cost Management?

Here are the main challenges of cloud cost management.

Insufficient Visibility into Your Cloud Spending

A major cloud cost management challenge is a lack of visibility into a company’s spending activities. Some businesses may encounter hidden costs because they lack the tools to track their cloud spending. You may end up spending more than necessary due to misunderstanding cloud costs. 

You can solve this problem by granting access to cloud spending reports so that everyone can understand the impact of their activities on the company’s spending. You can also use software with detailed visualizations that give you better insight into your cloud spending.

You can find and eliminate hidden costs associated with cloud services with the right cloud management tools. To manage your cloud costs, choose a tool that provides a comprehensive view of all the cost centers in the cloud. Aggregating all usage and cost reports helps you optimize your cloud costs.

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Inaccurate Predictions and Budgets

Cloud spending is difficult to predict, especially when using many cloud resources. Cloud costs can quickly increase when you adjust your roadmap or perform certain tasks.

Inaccurate budget forecasting can negatively impact your cloud cost management efforts. If your budget is too tight, you risk the application’s performance. Going over budget could mean paying for resources you don’t use. Don’t rely on estimates alone—use a test environment to predict your future usage patterns.

A cloud cost management tool can analyze resource health to provide more accurate forecasts. It tells you what to expect based on historical data and trends.

Billing Complexity

Billing can be complex and should not be the sole responsibility of the finance team. When building your cloud workloads, you must make sure every department understands its cloud costs. For example, development teams often focus on speed and efficiency and forget to manage cloud costs. Chargebacks must be transparent to prevent billing issues.

Cloud Cost Management Tools from the Leading Cloud Providers 

AWS Cost Management Tools 

Amazon Web Services’ cost management tools include:

AWS Cost Explorer

Cost Explorer has a user-friendly interface to help customers view, analyze, and manage their AWS usage and costs over time. It offers several default reports that can be a starting point for cost analysis. 

AWS Cost Categories

The Cost Categories feature is part of the AWS Cost Management suite. It lets customers group usage and cost data into semantic categories based on their specific requirements. It supports custom categories that display cost-related information based on predefined rules, referencing dimensions like account, service, tag, and charge type.

AWS Budgets 

The Budgets feature lets customers create budgets for tracking their usage and costs across various use cases. It supports SNS and email notifications to alert customers when costs approach or exceed the specified budget thresholds. Alerts can also indicate if Savings Plan coverage falls below the specified threshold. 

AWS Cost and Usage Reports (CURs)

A CUR contains detailed AWS usage and cost information. They contain added metadata about reserved instances, savings plans, services, credit, pricing, fees, discounts, and taxes. It itemizes AWS usage based on usage type, product, and operation at the organization or account level. CURs are available at the member or management account levels and at monthly, daily, or monthly levels of granularity. 

Google Cloud Cost Management 

Google Cloud Platform (GCP) is a public cloud that offers free cost management tools. There is a charge for storing or processing cost data using Google cloud services, but the tools themselves are free to use. Google’s cost management tools include:

GCP Pricing Calculator

The GCP pricing calculator allows customers to select cloud services and specify parameters like specifications, instance numbers, and the expected monthly running time. It assesses data transfer and storage requirements to provide detailed cost estimates. The calculator can also compare the cost of GCP against other cloud service providers.

GCP Resource Hierarchy

GCP lets customers establish a granular resource hierarchy to control access permissions and cloud service cost parameters. It supports policies incorporating quotas and cost parameters at various hierarchy levels, applying the policies to both the current node and all its children.

Billing Access Control

The Google Cloud Identity and Access Management (IAM) solution lets customers assign access roles at all levels of the resource hierarchy for cost management activities. Google’s cloud IAM supports several billing access roles, including the billing account creator, administrator, user, viewer, and project billing manager. 

GCP Quotas

GCP project owners can apply hard limits to their project’s resource consumption. Allocation quotas determine the maximum number of instances that can run per project, while rate quotas limit the number of read/write operations per given timeframe (i.e., a day). Rate quotas reset after the specified period. 

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Azure Cost Management

Azure’s cost management tools include:

Azure Price Calculator

The calculator estimates Azure service costs based on the customer’s settings. It provides a breakdown of each service’s costs depending on the specified details, allowing customers to plan their Azure costs upfront. 

Azure Cost Analysis

The Cost Analysis tool breaks down Azure cost details to provide in-depth views based on groups and filters. It lets customers assess the cost of each service and compare it to the estimated cost. This capability is important for tracking Azure spending to avoid surprises. 

The Cost Analysis dashboard supports filters such as time, scope, granularity, and groups. The results are exportable to Excel or CSV, and customers can schedule regular exports. 

Learn more in our detailed guide to cloud cost calculators (coming soon)

Azure Cost Alerts

Azure offers three cost alert types:

  • Budget alerts—notify customers when costs approach or exceed the specified budget. The Azure portal and Azure consumption APIs let customers set budgets to enable automatic alerts.
  • Credit alerts—notify customers when they’ve consumed their credit commitments (90-100% of the credit balance).

Spending quota alerts—notify departments when they approach a spending threshold to help them stick to the quota.

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