Introduction
While most Amazon customers know they can save up to 56% through reserved pricing, a surprisingly large percentage have not yet made the commitment. Why? While the opportunity to save on cloud costs has never been better, it has also never been more complex to determine whether reserved instances are right for you. Below is a short decomposition of the AWS reserved pricing model to help you determine if and when to use reserved instances.

What Is a Reserved Instance?

Reserved instances allow you to make a one-time payment to your cloud provider in return for a discounted hourly charge. Amazon and IBM are the only two public cloud vendors that make reserved instances available today, each with very different incentives and pricing models. The cloud vendor rationale for reserved pricing is simple: by getting customers to commit to the usage of specific infrastructure, they can better manage their capacity, and therefore pass these savings on to their customers.

Amazon provides three types of reserved instance types: light, medium and heavy. You can reserve instances for either one or three years, depending on how long of a commitment you are willing to make. Heavy reserved instances provide the best discounts, but require more utilization over the term to realize the full benefits. In addition, three year terms provide better cost savings to one year terms.

Analyzing Reserved Pricing

When Amazon first released its three types of reservations (heavy, medium, light) last November, I couldn’t help but think there must be a sadistic streak in the AWS pricing team. But when you analyze the model, it becomes clear there are some simple rules to determine whether reservations make sense for you. To better understand the model, we have provided the below table, which shows the price savings for a c1.medium instance (two virtual cores, 1.7GB memory, 350GB disk) at different levels of utilization.

[table id=15/]

As you can see, Amazon has linearly increased the penalty for underutilizing instances with each graduated reservation type (light, medium, heavy), while at the same time increasing the percentage utilization required to achieve cost savings during the reservation term. For example, a 3 year heavy reservation for a c1.medium that is used 80% of the the term will provide a 45% cost savings; but utilizing this node for only 20% of the term will result in a -119% savings. Note: all hourly costs in the table are computed by including the one-time reservation cost in the hourly rate, in order to provide what we consider the actual hourly rate. Also, with heavy reserved instances, Amazon charges you at 100% utilization for the contract term independent of what you actually utilize.

Rules for Using Reserved Instances

The basic rules you can follow to determine if and what type of instances to use are as follows:

  • If you cannot commit a specific instance type for at least the next year, do not use reserved instances
  • If you cannot commit to a specific availability zone for at least the next year, do not use reserved instances
  • If you cannot commit to utilizing an instance for at least 40% per year or 30% for the next three years, do not use reserved instances
  • If you can commit to utilizing an instance more than 70% for the next year or more than 50% for the next three years, use a heavy reservation
  • If you can only commit to utilizing an instance for 50-70% of the next year, use a medium reservation *
  • If you can only commit to utilizing an instance for more than 40% for the next year or 30% for the next three years, use a light reservation
    By applying these rules to all your compute infrastructure, you almost certainly will identify one or more areas where you can save money through the use of reserved instances. A typical AWS customer can reduce their monthly bill by 30-40% using reserved instances.

Conclusions

Amazon is known as a price leader in cloud computing, reducing pricing on AWS services 19 times in just the last year. But one of the most underutilized pricing discounts has been available since 2008. So if you run instances on Amazon, save your organization money by losing your fear of commitment. At Chez Amazon, it’s reservation required.

* Oddly enough, there are not many use cases for a medium usage reservation, and even fewer for a three year medium reservation. I’d recommend you consider bypassing medium and just using light or heavy.

This blog runs on a three year reserved t1.micro instance at a cost of a little less than $0.32 per day.