You could make the backup much smaller if you only wanted file backup and not a full system image. Another possibility is to use a different program such as Macrium Reflect which has higher compression. I have used Windows 7, Macrium Reflect, and Acronis Western Digital Edition.
It appears that your Windows partition has a lot of large files to result in 23 GB file backup and 124 GB system image. My system has only 8 GB file backup and 30 GB for the system image. You might review what is on your C: partition and whether it is all needed. I also wonder if your D: drive has a recycle bin containing a lot of data. That could explain why more free space is not available. I often format my backup drive before writing updated backups...