A method and apparatus are disclosed for increasing virtual storage capacity in on-demand storage systems. The method utilizes data compression to selectively compress data stored in a storage resource to reduce the utilization of physical storage space whenever such physical resources have been over committed and the demand for physical storage exceeds its availability. In one exemplary embodiment, the utilization of the capacity of a shared storage resource is monitored and data is selected for compression based on the utilization. The compression of the selected data is triggered in response to the monitoring results. In addition, policies and rules are defined that determine which data is selected for compression. For example, the selection of data may be based on one or more of the following: a degree of utilization of said capacity of said shared storage resource, a volume size of said data, an indicator of compressibility of said data, a frequency of use of said data, a manual selection of said data, and a predefined priority of said data. The disclosed methods improve the operation of virtual allocation by further enhancing the availability of physical space through data compression. Virtual allocation and block-based data compression techniques are utilized to improve storage efficiency with a minimal risk to system availability and reliability and with a minimal impact to performance (access time and latency).