Cloud vs on-premise - Cost comparison

It's hard to believe that it has only been a considerably short time since cloud solutions first began to enter the marketplace. In such a short time, they have made tremendous strides, almost matching and even surpassing the on-premise solutions in terms of delivery. The once wide gap between on-premise and the cloud is getting way thinner. 

This fast growth of the cloud has meant that businesses are quickly coming to realize the many advantages that cloud solutions have to offer. And since cost is always going to be a critical factor, the natural starting point is to perform a comprehensive cloud vs on premise cost comparison before making a decision about which is right for your organization.

Let’s do some interesting on premise vs cloud cost comparison, next.

Cloud vs on-premise — a comprehensive cost comparison

This comparison analyzes the major cost elements and how they compare for on-premises and cloud-based solutions. Spoiler alert: the cloud is often cheaper! Read on to find out why.

1. Upfront costs

Upfront costs refer to the initial cost  a business will need to incur in order to get either of the systems (cloud or on-premise) running. 

The upfront costs for the cloud are way lower compared to the on-premise costs.  You only need to identify a provider, choose a plan, make the first payment and you are good to go. That’s how the cloud works.

In contrast, the premise option requires you to acquire hardware like servers and software licenses upfront which can often cost a lot of money. For example, a small server that a small business of about 15-20 people can use to store files can cost anywhere between $5000 — $10,000. A much bigger server for more tasks can cost upwards of $20,000 — $25,000 or even more.

You might also need to pay for installation and necessary consultancy including training for your teams. 

2. Hardware replacement costs

When we talk about hardware replacement costs, we mean the cost of replacing items like physical servers, storage arrays, and networking gear with new hardware. This is something you will have to be prepared to do if you go the on-premise way. Don’t forget the cost of uninstalling the existing hardware, the storage or disposal costs, the transportation costs for the new hardware as well as installation. 

Cloud solutions on the other hand don't require any of that physical infrastructure, so in most cases, the only hardware replacement costs you need to worry about are the endpoints—the devices your users are going to be using to access your applications and data in the cloud.

Replacement is necessary because of upgrades and efficiency. This means that your on-premise vendors will always need to upgrade the critical hardware in order to add more features as technology evolves. The efficiency factor is also important because the more a server ages, for example, the more it deteriorates in efficiency and would need to be replaced.

Of course this replacement also happens in the cloud, only that the entire cost of replacement is distributed among all the users and consistently factored into the amount you pay as per your plan.

3. Power costs

Overall, the cost of power for cloud computing is generally lower than for on-premise systems. This is because data centers have economies of scale — they can buy power in bulk and get discounts that individual businesses cannot.

In fact let’s just say that using the cloud puts you in a position where you never have to worry about the cost of powering the infrastructure. The only power costs you incur are for powering the devices that your teams use. But for on-premise, you are essentially running all this big hardware that consumes quite some good amount of power. So this is a cost you just have to think about. 

Of course, there are exceptions to this general rule. For example, if a business has its own on-site renewable energy sources, then the cost of power for on-premise systems may be lower than for cloud computing. Similarly, if a business is located in an area with very high energy costs, then the difference in cost between cloud and on-premise may be less significant.

4. Maintenance costs

For on-premise, you have to pay for the IT professionals who are going to be maintaining the infrastructure. You are responsible for all the hardware and software, and you need to have someone on staff who's familiar with both. If something breaks, it's up to you to fix it.

Cloud solutions, on the other hand, are maintained by the provider. So you'll not be worrying about maintenance costs because they have already been factored into the pricing. In fact, most cloud providers offer a service-level agreement, which guarantees a certain level of availability and performance.

5. Downtime costs

Downtime costs can be higher or lower in any of the two, depending on how long the downtime lasts. The good thing with on-premise infrastructure is that at least you are in-charge. So you are likely to know the cause of the downtime and what exactly you may need to do to get back up and running as soon as possible.

But downtime in the cloud can be agonizing. Imagine your team is busy at work then suddenly the systems go down. You don't know what happened and how long the downtime will last. So you are left to raise support tickets to the providers, hoping the issues will be resolved promptly. Next is the waiting phase, and this is a cost by itself. The cost of the unknown cannot be quantified, and the psychological effect is so destructive that you will have lost so much by the time your teams get back to work. 

6. Unexpected costs

Unexpected costs have always been a huge concern for cloud users. There is almost a unanimous concurrence from the customers’ side that cloud providers have a myriad of hidden costs, so many that it’s almost impossible to have a crystal clear view of the costs. 

Cloud providers on the other hand insist that all costs are always there in the open. That in fact all a user needs to do is take time to understand the costs and always be on the lookout for changes in costs from time to time. 

It’s a debate that will never end. But the neutral fact is that the cloud tends to have more unexpected costs than on-premise. With on-premise, you know exactly what you're getting into—you buy the hardware and software, and that's it. You're in control.

But with the cloud, you're essentially renting space and using someone else's infrastructure. So while you don't have to worry about hardware or software upgrades, you do have to worry about potential bandwidth and storage overages. If you suddenly consume more, your monthly bill can shock you. 

To avoid any nasty surprises, it's important to read the fine print and understand what your provider's policies are when it comes to overages. You also need to have a good idea of how much bandwidth and storage you'll need, so you can choose a plan that's right for your business. And finally, make sure you're using a reputable cloud provider with a good track record. This will minimize the chances of unpleasant surprises down the road.

7. Security costs

The security of your IT infrastructure is essential especially in this era of cyber attacks such as the increasing number of threats originating in the dark web. You can report to work one day and find the entire network is down. Unfortunately this security comes at a price, and the best security comes at an even higher cost.

Luckily for the cloud, the providers do most of the heavy lifting. Once you have your operations running on the cloud, you will not find yourself worrying about things like server security. Your role in security is clearly defined and limited to securing your information in the cloud so that intruders don't get into your accounts. Every other aspect of security that is beyond this is the role of the provider.

But when it comes to on-premise, the business is fully responsible for the security of the entire infrastructure. This includes the physical security of all the hardware. This will obviously cost you more, not forgetting the constant need to upgrade the security measures as cyber criminals are always changing their tactics.  

8. Migration costs

Migration can mean many things for both on-premise and cloud. It could be that you are migrating from one provider to another. It can also mean a migration from the cloud to on-premise and vice versa, migrating your business from one location to another, scaling the infrastructure up or down, or migrating the business from one owner to another. 

All these forms of migration will bear different costs on the IT infrastructure.  With on-premise, you have to factor in the cost of the hardware, software, and labor. This is regardless of the kind of migration you are going to undertake. 

Cloud migration is generally a lot simpler. All you need is an internet connection and you can be up and running in no time. Plus, most cloud providers have great migration tools to take care of all the hustle. 

Also on migration: best practices for on-prem to cloud migration

The bottom line: which is cost-effective, cloud or on-premise?

Maybe we should just ask, is cloud cheaper than on premise? Well, it’s understandable that businesses are constantly facing this choice: should you stick with on-premise solutions or make the switch to the cloud? There are pros and cons to both approaches, but when it comes to cost-effectiveness, cloud services have a clear advantage.

As you can see from the cloud cost vs on premise comparison, cloud services are typically much cheaper to set up and maintain than on-premise solutions. There's no need to purchase hardware or software upfront, and you can scale your usage up or down as needed without thinking about acquiring additional hardware and software. You will only change the plan. 

Most cloud providers also offer discounts for long-term contracts, making it even more affordable to use cloud services over the long term. In contrast, on-premise solutions require a significant investment in hardware and software, and they can be difficult and expensive to scale. 

In some cases though, it may make more sense to keep certain workloads on-premises, while migrating others to the cloud. For example if your organization is worried about keeping certain data outside the company's premises, then you might want to go for on-premise servers for this type of data. 

Further reading: reasons to move to the cloud

Calculating the total cost of ownership (TCO) 

For on-premise, you need to factor in the initial purchase price of the hardware and software, as well as the installation and set-up fee. You'll also need to factor in other costs such as maintenance and updates, energy costs, as well as the staff required to manage and operate the system. Then, you need to estimate the costs of maintaining that hardware and software over the years. 

For the cloud, remember you don’t need to own the infrastructure.  So we can’t really talk of the cost of ownership with reference to the cloud. But we can talk about the cost of renting the cloud, which again is determined by the plans you choose, which vary from provider to provider. 

The total cost of ownership for on-premise can provide a good baseline to calculate the savings you will make when you switch to the cloud. Microsoft Azure have a good TCO calculator that you can use to estimate the savings. Of course this calculator is based on the Azure cloud but it should give you a general picture that you can use to make decisions. 

Finally, you need to consider the opportunity cost of using on-premise infrastructure instead of the cloud. For example, you might be losing out on revenue because your employees are spending time maintaining servers instead of working on new projects.


As we mentioned at the beginning, cost will always be a critical factor.  But there are definitely other factors that can be the ultimate determiner of whether to go with the cloud or on-premise. It really comes down to what is more important for the company, regardless of cost. But as for cloud costs vs on premise costs, the cloud clearly wins.

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