Cloud Cost Models: Definition, Types, Importance, Challenges

There are three main components for cloud cost:

• Compute: The cloud providers diverse compute instance types, each with specific CPU, resources, memory, and sometimes specialized hardware, number and types of instances used, along with the duration of their usage.
• Networking: Billing for networking services is commonly tied to the volume of data transferred into and out of the cloud service.
• Storage: Cloud providers present storage as a service, with costs determined by usage. customers pay based on the gigabytes per month utilized.

Types of Cloud Cost Models

There are following types of cloud cost model types:

1. Pay-As-You-Go and On-Demand (Pros and cons & Best Practices)

A. Pay-As-You-Go

In the case of the pay-as-go model, the cloud services are billed as per the actual usage with monthly or hourly rates. This bill includes cloud services such as the utilization of computing power, storage, networking, or other resources. The advantage of the pay-as-you-go model is that we pay only for what we have consumed and can scale down resources when needed. This minimizes risks, predictably manage budgets, ply with long-terms requirements.      

Some of the cloud cost models example for Pay-As-You-Go model includes the following:

There are following pay-as-you-go plans that come in two main types.

• Consumption-Based: In this plan, the more we use a certain resource (like transactions, storage, bandwidth, minutes, and so on), the more we pay. Ex: We don’t need to pay for any monthly fee or subscription charges, just pay-per-use price for each transaction.
• Credit-Based: In this plan, we purchase credits that can be exchanged for a service, so we purchase a service in advance and then use it. Ex: – Audible service lets us purchase audiobooks for credits as we get credits every month as we are on a subscription plan.

Pros of Pay-As-You-Go model

There are following advantages of using Pay-As-You-Go model:

• Lower upfront costs attract users
• Charge more for high consumption
• Get to know your customers usage
• Revenue grows faster with Pay-As-You-Go

Cons of Pay-As-You-Go model

There are following disadvantages of using Pay-As-You-Go model:

• Challenging To Retain Customers
• Revenue Is Unpredictable
• Pay-As-You-Go Is complex

Best Practices for Pay-As-You-Go model

• Choose the right Metric or Resource
• Track and Analyse Usage
• Determine Time and Frequency of Billing
• Rely on the Right Tool

B. On-Demand

It refers to compute capacity that’s available for purchase and deployment as in when needed. This enables us to start, stop, reboot, pause, hibernate, or terminate an instance or virtual server as in when required.

Pros of On-Demand

• Flexibility: Organizations can change resources up or down based on their changing needs without any financial penalty.
• Zero upfront costs: There is no initial financial commitments, organizations can commence their cloud computing journey and simplifying the onboarding process.
• No long-term contracts: Businesses can utilize services without entering the long-term contracts.
•  Predictability Limited: There is a high dependency on usage as high variables workloads can be challenging.
• Unlimited capacity: We can essentially purchase an unlimited number of On-Demand Instances at any given time.
• Increased options: These can run most types of compute workloads.

Cons of On-Demand

More Expensive: These are most expensive compared to Reserved and Spot Instances as we need to pay per second (Linux) or per hour (Windows) OS.

Wastage is likely: In case of on-demand capacity which is not sure how much capacity they actually need for a particular use case, leading to increased cost.

There are three types of AWS Savings Plans:

• EC2 Instance Savings Plan
• Amazon SageMaker Savings Plans
• Compute Savings Plans

5. Spot Instances

These are usually the lowest-cost computing options that offer discounts of up to 90% compared to pay-as-you-go rates. These are used by cloud providers to sell off spare capacity. These can be interrupted at very short notice and used for workloads that are stateless, fault tolerant, or processes that can be stopped and restarted.

Pros of Spot Instances

• Cost savings
• Scalability
• Flexible pricing

Cons of Spot Instances

• Interruption
• Unpredictable availability

Best Practices for Spot Instances

• Use fault-tolerant architectures: Essential for design applications that can handle failures and restart automatically.
• Use auto-scaling: Organizations can scale-up and scale-down in response to demand fluctuations,
• Monitor instances diligently: Establish alerts within the organization to promptly identify any potential interruptions.
• Conduct Cloud Cost Audits: This determines where our expenditure is going and categorizes them as per the priority.
• Use in non-critical workloads: Organizations avoid the use of critical workloads that require high availability and stability.

AWS and Azure Cloud Cost Models

AWS offers four main cloud pricing models pricing models:

• Pay-As-You-Go Model
• Subscription-Based Model
• Reserved Instances Model
• AWS Savings Plan Model
• Spot Instances Model

Azure offers four main cloud pricing models pricing models:

• Pay-As-You-Go
• Azure Hybrid Benefit
• Reserved VMs
• Spot VMs

AWS vs Azure: Pricing Model

AWS vs Azure: Cost Management Tools

There are different cloud costing models for AWS and Azure which are mentioned below:

Advantages of Cloud Cost Models

There are following advantages for cloud cost models:

• Cost Optimizer: It provides an overview to the customers about the usage of services and helps users to use the correct cloud model as per the requirement.
• Flexibility: These are flexible in nature as they can handle various dynamic changes as per the requirements of the customers.
• Cost transparency: It helps the customers like us to monitor the resources we are using and paying.
• Scalability: Customers can scale up and down as per the user’s requirement and needs.
• Predictability: Cloud cost model is very useful in making predictions about the cloud cost as per the usage patterns.
• Resource utilization: These are useful in recommending the best way to use the resources that will cause minimum cost.

Challenges of Using Cloud Cost Models

There are following challenges of using cloud cost models in cloud computing:

• Insufficient Visibility in cloud spending
• Inaccurate Predictions and Budgets
• Billing Complexity
• Poor Cloud Architecting

Different Cloud Service Cost Models

The cost model in cloud computing can be time-based, cost-based, or auction-based, depending on many factors. The three main cloud pricing models are value-based, market-based, and fact-based. The main factors determining the cost of cloud computing services are:

• Compute: It offers different compute instances with different memory and CPU features. It can leverage dedicated hardware, including high-speed networking and graphics acceleration.
• Network: It is based on the amount of data transferred to or from the cloud service.
• Storage: It is a service that may charge monthly for each GB of storage used.

a. Customer Value-Based Cost Model: These are of four categories such as perceived value, feature, psychological and hedonic-based model. The construction of these is based on perception, sociology (large environment), psychology, and economics (utility).

b. Performance-Based Cost Model: A performance-based cost model charges are determined by the performance metrics and capabilities of the service. This model is connected to the client’s business outcome that relies on specific performance metrics.

c. Service-Based Cost Model: A service-based cost model refers to a pricing structure based on specific services utilized in banking, airline, travel, legal consultant, insurance, hospital, etc. Its service is measured using the unit of a level, tier, per device, user, and priority. The value for this model can be predicted and identified.

d. Retail-Based Cost Model: This applies to the B2C (Business-to-Consumer) model which is based on a small no. of customers that buy from physical locations/ retail outlets. It has four further subcategories of cost model i.e. discriminatory pricing, discount and allowances, product mixing, and promotional mixing.

e. Expenditure Based Cost Model: It is of three cloud cost models cost-plus, target return, and percentage cost model. Here a cost is decided on using the application for a central component as a unit of charge.

f. Resource-Based Cost Model: This is structured around the consumption of resources and consumption of services. This model is associated with a pay-as-you-go approach, allowing organizations to pay for the resources they use, providing a more granular and efficient cost management strategy.

g. Free Upfront and Pay Later Cost Model: There are many cloud service providers that offer upfront and pay later cost models to leverage their products.

h. Auction and Online-Based Cost Model: This determines pricing and allocation systems as the demand for cloud resources and their features are not uniform, dynamic pricing and allocation techniques are convenient.

How Cloud Cost Models Play a Role in Cloud Cost Optimization?

The cloud cost model is a key focus of cloud cost optimization, addressing not only challenges related to cloud performance and security but also delivering various other advantages.

Here are some of the benefits of using cloud cost model in Cloud Cost Optimization:

• Higher cost savings
• Improved efficiency
• Smarter budgeting
• Enhanced performance
• Reduced security risks
• Improved business continuity
• Greater sustainability

Conclusion