A compression technique for storing multiple backup versions. If backups are routinely made of the same files and databases, there may be only a small number of changes between versions with most of the data in the latest backup identical to the previous backup.

Capacity optimization works by breaking data files into parts, and if any part in the new backup file is the same as the last backup, that part can be turned into a reference to the original rather than storing all the data. Whereas normal data compression typically reduces a text or database file to around 40 to 50% of the original, capacity optimization can reduce a new backup version to as little as 5% of the original. See data compression.