How to tackle the impact of inflation & energy costs on cloud pricing

The global economy has been on a rollercoaster over the past few years, navigating through challenges like the pandemic and geopolitical conflicts. These disruptions have triggered inflationary pressures and soaring energy costs, leaving businesses to adapt to an unpredictable landscape.

Although inflation is showing signs of easing—projected to fall from 6.8% in 2023 to 5.9% in 2024 and down to 4.5% by 2025—the overall growth outlook remains tepid, particularly for emerging markets.

The energy sector tells a similar story. Despite some relief in global energy prices, electricity demand is expected to rise by about 4% in 2024, contributing to sustained pressure on industries worldwide.

Among the most affected sectors is cloud computing, where inflation and rising energy costs are the major factors driving operational expenses and ultimately, cloud service pricing.

The Cloud Impact

Cloud data centres require vast amounts of energy to power and cool their infrastructure. While inflation and energy costs have slightly eased, cloud providers may not experience the same relief as other industries due to the long-term contracts they often sign for energy and resources. These contracts can lock providers into higher expenses, leading to elevated operational costs that are passed on to customers.

Labour costs have also surged, driven by a shortage of skilled talent in critical IT roles. Additionally, the costs of producing CPU and memory chips have faced spikes, further increasing cloud prices. Cloud providers have been forced to adjust their pricing structures to offset these rising expenses.

Gartner reports that for the first time, price hikes—rather than increased usage—are driving cloud cost inflation. This reduces the funds that companies might otherwise allocate to innovation projects. A recent survey revealed that three out of five businesses saw their cloud spending rise, with nearly 40% experiencing cost increases of over 25%. The growing demand for AI technologies has also significantly contributed to these price surges.
Cloud cost management has become a top priority for IT leaders, pushing enterprises to adopt cloud optimization strategies to remain competitive amidst financial pressures.

PS: You might have noticed 'shrinkflation' hitting tech services too. Ever seen SaaS providers offering fewer features for the same price? Rising cloud costs could be part of the reason behind this trend.

Your Move Now

While many of the factors that cause the cloud cost surge would be beyond our control, what we can do is optimize our cloud infrastructure for better cost-to-performance numbers. Here are some strategies to reduce cloud costs:

Architectural Changes

By optimizing how workloads are deployed, stored, and scaled, businesses can make significant savings. This might include refactoring applications to be more cloud-native, using containerization, or adopting technologies like serverless computing models. 

Another cost-saving strategy is switching from traditional x86 processors to ARM-based alternatives. Cloud providers like AWS (Graviton), Azure (Ampere Altra), and Google (Tau T2A) now offer ARM-based processors, which are more energy-efficient and scalable, with research showing potential savings of 20-52% compared to x86 options.

Discount Programs

Most cloud providers offer various volume and usage-based discounts that can significantly reduce your costs for a certain commitment. Take advantage of these discount programs to ensure you’re not overspending on the pay-as-you-go models.

Prioritizing Cloud Economics

Cost management should be an organization-wide discipline. Build a strong FinOps culture that encourages collaboration across teams to track, optimize, and manage cloud costs in real time.

Continuous Optimization

Regularly monitoring your cloud infrastructure helps you find multiple opportunities for cost and performance optimization. By fostering a culture of continuous optimization, you can eliminate wasted resources, reduce underutilization, and maximize the value of your cloud investments.

Optimizing Cloud Usage for AI

To efficiently strike a balance between cloud costs and AI innovations, organizations should focus on right-sizing resources and selecting the right instance types for model training. Efficient data management, selection of appropriate AI services, and careful GPU usage are also crucial strategies for minimizing expenses. 

Conclusion

Global forces are significantly shaping the business landscape, making it essential for organizations to innovate, especially as AI and other technologies become more prominent. By effectively managing your cloud costs, you can save both time and money, allowing for a more streamlined strategy

Whether you choose to build an in-house FinOps team or partner with a cloud cost optimization expert, implementing a robust cloud FinOps strategy will enable you to navigate these troubled waters. Striking the right balance between innovation and costs is the best way to tackle "cloud-flation."

Written By - Deepak Mittal, CEO and Founder of CloudKeeper. 

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