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AWS Costs

Understanding AWS Total Cost of Ownership (TCO)

What Is Cloud Total Cost of Ownership (Cloud TCO)?

Cloud TCO involves calculating the costs required to host, run, integrate, secure and manage workloads in the cloud over their lifetime. These include fees associated with the underlying infrastructure, such as compute, data transfer and storage. It also includes the cost of supporting cloud services, ranging from security and management tools to data analytics. Manpower costs for cloud engineers should also be part of a cloud TCO equation.

Read on to learn how to estimate your AWS costs, understand the TCO of your current on-premises infrastructure, and understand the financial viability of migrating to the AWS cloud.

In this article:

Calculating Total Cost of Ownership on AWS

AWS costs depend on three key components: compute, outbound data transfer, and storage. The AWS pricing model and the product’s specific characteristics determine the charges for each of these components.

Data transfer
Generally, AWS does not charge for inter-service data transfer within a region or inbound transfer. However, there are certain exceptions, so it’s important to check the data transfer costs before starting. AWS calculates your aggregated outbound data transfer across all services and charges based on the specified rate. The monthly AWS statement specifies this charge under “Data Transfer Out.” The amount of data transferred determines the cost per GB.

AWS charges per hour for compute resources, billing you from when you launch each resource until termination (for on-demand resources). There is also an option to make reservations with predetermined, set costs. AWS offers several compute instance types, such as the Elastic Compute Cloud (EC2) instances, which allow you to optimize your computing costs.

AWS usually charges for each GB of data storage. There are several storage classes for different use cases and data types, so choosing the right storage class for your needs is important. Cold storage is cheaper but less accessible, while hot storage is more readily available but more expensive, making it unsuitable for long-term storage.

The AWS cloud offers fixed and variable pricing models, providing flexibility and scalability at optimized costs. AWS offers several tools for calculating and managing costs, including resources to help you plan budgets, forecast spending, and track your usage and costs. These tools can provide recommendations for optimizing costs.

When calculating your TOC, you must consider the hidden, indirect costs that are difficult to predict, such as the cost of downtime, reduced productivity and other issues. The TOC assessment should include an evaluation of what-if scenarios, such as over-provisioning and changing requirements.

Common Mistakes that Drive Up AWS TCO

Here are some of the common mistakes AWS customers make, which can end up increasing their TCO and running down cloud savings:

  • Orphaned resources—AWS customers often create cloud resources, such as Elastic Compute Cloud (EC2) instances or Elastic Block Storage (EBS) volumes, without putting in place auto-scaling mechanisms. This is common when using AWS for dev/test environments, which are easy to set and forget after development ends.
  • Misconfigured storage tiers—failure to properly use storage tiers on the Simple Storage Service (S3). Amazon S3 provides several cold storage and archive tiers with lower storage costs, and many customers fail to utilize these for data that is infrequently accessed, saving all data in the default S3 Standard tier.
  • Over-provisioned compute resources—a critical optimization in any cloud is to consolidate cloud resources and make sure workloads use the appropriate number and size of compute instances (this is known as right-sizing). Many AWS customers fail to identify these optimization opportunities. For example, they might run an application on an oversized EC2 instance, or run several applications on multiple instances, while all these applications could run on one instance at lower cost. AWS research shows that right-sizing workloads can save up to 36% for the average customer.
  • Incorrect use of pricing plans—many organizations fail to leverage the AWS pricing plans that best match their usage patterns. Amazon offers several pricing models such as spot instances, which lets customers run workloads on compute instances which may be terminated with short notice, and receive discounts of over 90%. Another option is reserved instances, which offer significant savings compared to on-demand pricing, in exchange for a commitment of 1 or 3 years to AWS resources.

Related content: Read our guide to AWS cost optimization

Comparing AWS TCO to On-Premises TCO: Building a Cloud Migration Business Case

Evaluating the total cost of ownership (TCO) for cloud migration projects can be a challenge. It involves evaluating what-if scenarios, over-provisioning scenarios, and what to do with legacy on-premises infrastructure. There are various indirect costs that are difficult to calculate, such as downtime and reduced productivity as a result of low resilience of on-premises infrastructure.

To reduce the complexity of cloud migration, many organizations choose to lift and shift all their assets to the new cloud environment. The drawback of this lift-and-shift strategy is it often increases TCO, which defeats one of the main purposes of migrating to the cloud—reducing costs.

A smarter strategy is to perform a TCO analysis and right-size assets in AWS before migrating. This means ensuring that the cloud infrastructure you provision is appropriate for your workloads. Right-sizing assets ensures that the cloud can support your peak utilization, while you do not overspend on unutilized resources.

Calculate Current IT Infrastructure Costs

The first step toward calculating your AWS TCO is to understand the real cost of your on-premises IT infrastructure. This means determining the overall costs (direct and indirect) of running and maintaining current systems and estimating current workloads such as servers, storage, network bandwidth, and databases.

Consider the following elements affecting cost:

  • Data center facilities—how much it costs to operate a data center. How much it costs to meet your power, cooling, and space requirements.
  • Hardware and infrastructure—determine the cost of hardware to support your on-premises applications. This includes physical servers, consumables, and spare parts.
  • Software—calculate your current software usage, such as the number of licenses and license costs.
  • Personnel—identify the manpower costs of everyone involved in managing the system, network, and database.
  • Disaster recovery—if you have a disaster recovery solution, how much it costs to maintain your site.
  • Security—estimate the total cost of protecting your systems. Consider all expenses, including physical security, firewalls, and security professionals.

Consider Additional Benefits of the Cloud

In addition to comparing the financial impact of on-premises vs cloud solutions, there are also opportunity costs associated with cloud migration. You need to quantify how this may affect your business:

  • Innovation—cloud providers offer hundreds of services with on-demand access. Continuing to use on-premises systems sacrifices developers' ability to respond quickly to market changes.
  • Elasticity—handling demand in an on-premises environment is usually a challenge. The solution is often to maintain redundant infrastructure to accommodate peak loads. However, in the cloud you can easily deploy instances to handle additional peaks without downtime.

Build a Business Case

Once you've done your cloud TCO analysis, you need specific numbers to help you make a decision. Take the following points into account:

  • Cloud adoption is not purely about cost savings. Often, cloud environments offer a higher ROI and improve business outcomes, but they don’t necessarily result in a lower TCO.
  • Comparing the opportunity costs and business value of moving to the cloud vs remaining on-premises is as important as comparing the direct cost.
  • When performing cloud TCO analysis, it is important to identify cost savings and other efficiencies.

Optimizing AWS Total Cost of Ownership with Cloud Volumes ONTAP

NetApp Cloud Volumes ONTAP, the leading enterprise-grade storage management solution, delivers secure, proven storage management services on AWS, Azure and Google Cloud. Cloud Volumes ONTAP capacity can scale into the petabytes, and it supports various use cases such as file services, databases, DevOps or any other enterprise workload, with a strong set of features including high availability, data protection, storage efficiencies, Kubernetes integration, and more.

In particular, Cloud Volumes ONTAP provides storage efficiency features, including thin provisioning, data compression, and deduplication, reducing the storage footprint and costs by up to 70%. Visit the Cloud Volumes ONTAP TCO Calculator for AWS to check your savings.

Learn more about how Cloud Volumes ONTAP helps cost savings with these Cloud Volumes ONTAP Storage Efficiency Case Studies.

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Yifat Perry, Product Marketing Lead

Product Marketing Lead