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Reserved Instances: The Best Way to Cut Costs in AWS

David Malcom

B2B/B2C Tech Writer

A pile of money and a downward arrow

Oftentimes enterprises have to regularly run major computing tasks as part of their daily operations. These ongoing costs can hurt the companies budget. Recognizing that businesses need regular, on-demand boosts in computing power and at the same save on cost, Amazon launched its newest option for Amazon Web Services (AWS) EC2 pricing model commonly known as Scheduled Reserved Instances (RIs). They provide them as an alternative to standard On-Demand instance pricing. With an upfront commitment of one or three years, reserved instances offer significant cost savings, up to 72% compared to on-demand rates.

Without a solid understanding of reserved instances fundamentals, you can end up overspending on the cloud with little ROI. To help you maximize your AWS savings, we will look at what Reserved Instances are, why you should use them, and how RI can help cut costs in AWS.

What are Reserved Instances

A Reserved Instance allows a business to obtain a significant discount in using certain on-demand instances in return for committing to a period of one or three years. Ideally, you commit to the amount of capacity you need over the specified period and qualify for a discount on the standard price. The amount of the discount varies depending on the length of the commitment and the provider.

How to Save Money with Reserved Instances?

It’s a common question most AWS users encounter when they are told that Reserved Instances can save cost. So how do they actually do that?

While the concept is popular because of EC2 Reserved Instances, it also applies to many other AWS services. The key reason for making a reservation is because it features substantially lower prices than On-Demand prices, which lowers the cost of the resources you’re already using. There are over 2,000 types of Amazon Reserved Instances, each with a unique break-even point – the point where you achieve the required usage out of the reserved capacity to cover the amount you paid upfront.

It offers discounted hourly rates in exchange for a one or three-year commitment. The longer you commit, the higher the discount compared to On-Demand prices. You can save up to 72% by using an RI.

Reserved Instances Options

Since RIs are essentially discounts given to on-demand requests, their cost is tied to the actual cost of on-demand instances.

That said, RI pricing is determined by the following key variables:

Instance Attributes

A Reserved Instance has four main instance attributes that determine if a discount is applied. The on-demand instance should have matching attributes with the RI, for the discounted rate to apply.

Instance Type: It represents a varying combination of CPU, storage, memory, and network capacity. For example, in m5. xlarge, m5 represents the instance family and xlarge is the instance size. It defines how powerful every instance should be.

Region: It’s the region where the RI is purchased

Tenancy: This is the hardware type on which your RI runs. It can be either single-tenant (dedicated) or shared (default).

Platform:  RI should match the operation system – Windows, Linux/Unix, etc.

Term Commitment

When it comes to reserved instances, there are two terms of commitment available for purchase:

  • One year, which is defined as 31,536,000 seconds (365 days)
  • Three years, which is defined as 94,608,000 seconds (1095 days)

The longer the contract, the higher the discounts.

Payment Options

AWS Reserved Instances allows you to choose from three different payment options.

All Upfront: Includes one-time payment at the start of your term to cover the entire term of one year or three years. It offers the largest discount.

Partial Upfront: Part of the full amount is paid upfront for the term of choice (one or three years). The rest is paid monthly.

No Upfront/ Pay as You Go: You commit to pay full term but on a pay-as-you-go basis every month. You receive a smaller discount for every hour within the term.

When it comes to payment, the larger the upfront payment, the higher the discount.  

Need Help with Managing Your Reserved Instances?

Clearly, AWS reserved instances offer great value to businesses and customers alike by allowing them to have clear visibility into their cloud costs and provide a way to significantly cut costs. 

But there is a limit to the number of RIs that users can purchase every month. For every region, you can purchase 20 regional RIs every month and an extra 20 zonal RIs per month for every Availability Zone. For each case, ensure you choose the correct number of combinations of reserved instances types to maximize your savings.

Ready to start optimizing your cloud cost, contact our AWS Services Management team or AWS Account Manager to help you get started with your optimization journey.

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