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Enterprises miss out on cloud cost benefits by sticking with on-demand pricing plans

451 Research suggests cloud users that sign up to long-term contracts with providers get better pricing overall than those who don't

Enterprises that stick with on-demand payment plans for cloud services may end up paying out more in the long run than firms who commit to lengthier, best-case pricing contracts with providers, research suggests.

According to the latest edition of the 451 Research cloud price index, the cost of using cloud is falling overall, but users who enter into long-term contracts with providers tend to feel the benefit more.

Its findings show that on-demand cloud pricing has dropped by 2.25% since October 2014, while users that get tied into longer contracts have benefited from cost reductions in the region of 12%.

To emphasise this point, the company’s analysis shows that a typical cloud application costs around $1.68 per hour to use on an on-demand basis, but just $0.95 per hour for contracted users. This represents a saving of around 44% for the latter group.

Speaking to Computer Weekly, Owen Rogers, senior analyst of 451 Research’s Digital Economics division, said on-demand pricing models are fine for users just starting out and experimenting with cloud.

“Generally we find on-demand pricing is really good for experimentation, as there is very little risk, you don’t have to make any form of up-front commitment and it’s accessible to developers, startups or groups of people in large enterprises who want to work out how cloud might fit in with their business,” he said.

“After this period of experimentation, we find that’s when CIOs and IT directors start to take note and want to make sure they’re benefiting from the cost savings and stability that come from moving to a best-case pricing scheme.”

On the whole, Rogers said cloud providers are good at encouraging user to adopt longer-term, best-case pricing plans because it benefits their capacity planning and infrastructure investment.

However, because of the relatively higher cost of using cloud services on an on-demand basis, users should be poised to make the switch as soon as it makes sense for their company to do so, Rogers continued.

“Given that they can save around 44% by switching over, they’re really missing a trick if they don't,” he said.

Cloud price war hype

The 451 Cloud Price Index is calculated by costing up the service specifications needed to operate a typical web server application. As previously stated, this cost – on an on-demand basis - currently stands at $1.68, which is down from $1.72 back in October 2014.

This slight drop in price may come as surprise to some cloud users, given the frequency with which the likes of Amazon Web Services and Google announce double-digit price cuts for their compute and storage services, said Rogers.

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However, running an application in the cloud tends to consume other services – aside from storage and compute – and that means the overall cost of running them may not work out as cheap as users may think.

“The cloud can be really good value, it’s just important users realise that as the price of compute and storage goes down, they’re also going to be using services that aren’t,” explained Rogers.

“For example, around 50% of a typical web application’s costs relate to cloud databases, and the sales of these value-adding services can help providers make up the shortfall on other services.”

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Not all workloads are the same. For example a webserver used in the example obviously needs to run 24/7 but what about an enterprise application running in the cloud. With on premise, you would probably just leave the machines running 24/7 but with cloud, you can have it on a timed start/stop so the machine is only running during office hours - that could reduce the running time from 168 hours to just 40 hours.

If you compare the cost of a reserved instance on AWS for this use case against the on demand case for a shorter period of use, then the on demand works out cheaper.

My own experience on AWS was that i bought a reserved instance for 1 year and a month later, AWS dropped the price of the on demand instances to below the reserved price i was paying. But as you have signed up to a contract, you still pay the higher price for the year.

Cloud needs a change of mindset in order to make the greatest savings - don't just move your applications to cloud and use them the same way you did with on premise, that will most likely cost you a lot more.