The savings metric every FinOps team needs to know: effective savings rate

Rate optimization is a cloud saving approach that involves paying the lowest rate possible for a given unit (hour, GB, etc.) of cloud usage via strategic use of commitment-based discounts, such as AWS Savings Plans/Reserved Instances and Google Cloud Platform Committed Use Discounts. To measure return on investment (ROI) from these discounts, organizations must understand and benchmark their Effective Savings Rate (ESR). ESR is the "North Star" rate optimization metric which incorporates utilization, coverage, and discount rates into a single, comprehensible figure that can be compared against industry peers.

According to the 2024 Effective Savings Rate Benchmarks and Insights Report by ProsperOps, the current Effective Savings Rate (ESR) results are generally poor. The median ESR for AWS compute services (Lambda, EC2, and Fargate) is 0 percent, indicating that many organizations are not leveraging commitment-based discounts and are paying on-demand rates. Even at the 75th percentile, the ESR is only 23 percent, suggesting significant room for improvement. These insights indicate that many organizations are not fully leveraging rate optimization as an approach to optimize cloud spend.

Improving ESR with rate optimizations leads to substantial cost savings without requiring changes to engineering or re-architecting. Read on to discover how understanding and optimizing your ESR can transform your cloud cost management.

Understanding Effective Savings Rate and Its Calculation

Effective Savings Rate (ESR) is akin to ROI in personal investing, providing a single measure of how well organizations’ savings strategies are performing. Just as ROI gives a clear picture of investment returns, ESR reflects the effectiveness of an organization’s cloud rate optimization strategy, combining utilization, coverage, and discount rates into a single, easy-to-understand metric.

It measures the percentage of cloud savings by comparing cloud savings generated from discounts to on-demand equivalent spend. ESR is a well-established metric -- it is part of the FinOps Foundation framework for the Rate Optimization capability, and can be found within native billing observability offerings from major cloud service providers.

ESR Formula:

Another advantage of ESR is that organizations can benchmark their performance against industry peers. This helps organizations identify areas for improvement and drives them to adopt best practices to enhance their savings rate.

Why Traditional Rate Optimization Metrics Fall Short Compared to ESR?

Traditional rate optimization metrics, such as utilization and coverage, often fall short when compared to Effective Savings Rate (ESR), since they only tell part of the story. Utilization measures the percentage of commitment-based discounts being used, while coverage looks at the percentage of cloud resources covered by these discounts. Many organizations equate higher utilization or coverage with more savings, but this is not always the case.

High utilization rates might not necessarily translate into more savings if the coverage is not optimized. For example, a 100 percent utilization rate might offer less savings compared to lower utilization with better coverage. In other words, if organizations commit conservatively, they may miss savings and have a low ESR.

Similarly, having 100 percent coverage does not guarantee maximized cost savings if the commitment-based discounts do not align with usage. In the simplest example, being overcommitted would result in 100 percent coverage, but of course committing above the optimal coverage point reduces overall savings, since you’re paying for unused commitments.

This means coverage or utilization alone cannot be trusted to maximize savings. ESR always correlates with cost savings, whereas utilization and coverage do not. Because ESR is inclusive of utilization, coverage, and discount rate (including periods of sub-utilization), a higher ESR always results in a lower cloud bill. 

FinOps experts often advocate maximizing both utilization and coverage together. But how do you do that effectively? Would you rather have an environment with 80 percent utilization and 90 percent coverage, or 90 percent utilization and 80 percent coverage? Rather than looking at multiple metrics, ESR consolidates rate optimization performance into a single, comprehensive number.

Latest ESR Benchmarking Industry Insights

What constitutes good or bad rate optimization performance? Organizations often seek to understand where they stand among peers. Based on the analysis of hundreds of AWS organizations, the 2024 ESR Benchmarking Insights Report reveals significant room for improvement in utilizing commitment-based discounts:

• 0 percent Median ESR: 0 percent across all organizations, indicating many are paying on-demand rates without taking advantage of available discount instruments.
• 23 percent ESR at the 75th Percentile: Even at the top percentiles, organizations  generated an ESR of only 23 percent.
• Underutilizationof Discounts: 53 percent of organizations do not utilize AWS Savings Plans or Reserved Instances, missing out on potential savings.
• Correlation with Usage: Higher compute usage correlates with higher ESR, as larger spending organizations tend to have more resources and better optimization practices.
• Automation Benefits: Automated rate optimization helps align discount commitments with real-time usage changes, ensuring better cost efficiency and reducing manual efforts.
• Impact of Small ESR Improvements: Even small increases in ESR can lead to substantial cost savings, particularly for organizations with high annual cloud spend.

Usage vs. Rate Optimization

These results also reveal the importance of both rate and usage optimization. Even today, the prevailing convention encourages FinOps teams to carry out usage optimization before pursuing rate optimization via commitment purchases. However, with the advent of true automation that monitors and executes in near real time, organizations can easily match commitment-based discounts to changes in usage and go after rate and usage optimization simultaneously. 

Final Thoughts

To consistently maximize your cloud cost savings, focus on improving your Effective Savings Rate (ESR). You can leverage third-party automation solutions to align commitment-based discounts with real-time usage changes, ensuring cost efficiency without having to manually manage it yourself. And, remember optimizing cloud costs is a continuous journey, not a one-time event.

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Matt Stellpflug is Senior FinOps Specialist at ProsperOps.