The default payment option for Amazon Web Services is on-demand pricing, which allows organizations to pay for only the services that they use by the hour. But if you are running instances continuously, on-demand pricing can quickly drive up costs.
According to research, companies waste $62 billion in the cloud by paying for capacity they don’t need. AWS Reserved Instances is a pricing option that can reduce cloud costs by up to 60%, compared to on-demand rates.
Reserved Instances for Savings in AWS Costs
For computing services, like Amazon EC2, and database services, like Amazon RDS and ElastiCache, you can reserve a set number of instances (or ElastiCache nodes) one or three years in advance.
AWS Reserved Instances are the best pricing option for production environments and mission critical applications that require high availability, and for steady state use cases with predictable workloads.
Learn more about how our automated cost management tool can help you optimize your cloud usage with Reserved Instances.
Unused Reserved Instances can be sold in the AWS Marketplace, before their term expires. To be able to sell in the marketplace, companies must have a US bank account.
Standard vs. Convertible Reserved Instances
You can choose the RI type that best fits your application needs in the cloud:
- Standard RIs allow you to modify Availability Zone, scope, network platform, and instance size (for Linux RIs).
- Convertible RIs can be exchanged for another one of equal or greater value.
RI Payment Options
You can choose between three Reserved Instance payment options:
- All upfront: You receive the largest discount
- Partial upfront: You receive a lower discount.
- No upfront: You receive a smaller discount, but free-up capital to spend in other projects.
What are the differences in cost for all upfront, partial upfront, and no upfront billing?
The larger the upfront payment, the greater the discount. For partial or no upfront options, the remaining balance is paid in monthly increments over the Reserved Instance term.
The table below illustrates the cost savings based on the Reserved Instance term commitment, upfront payment option and the type of RI used:
Parquantix pays the upfront fees for qualified customers, helping them preserve cash and invest in other areas of their business. Contact us to learn how we can help you.
All upfront RIs
These yield the highest discounts, yet the pricing differential with partial upfront RIs is not that significant unless you have large workloads. Sizing your workload will help you determine if you want to part with all the upfront fees at once, or pay a portion in montly increments.
No upfront RIs
While paying no upfront fees defers the required capital investment, they pose certain risks. You need to consider the following scenarios before deciding on this Reserved Instance payment option.
- For the latest generation instance types, such as r4, the pricing difference has narrowed by up to 4% compared to partial upfront, making it less attractive.
- If your usage changes, unused no upfront instances can be difficult to sell in the AWS Marketplace.
- Obscure RI types, such as g2, are unlikely to sell in the AWS Marketplace.
- If AWS lowers the price of the upfront RI, as it happens often, selling the RI will be nearly impossible.
- They are too risky for SQL Server instances and first generation types, such as m1.
- Overall, the pricing is less compelling for previous generation instances.
In consideration of these scenarios, no upfront RIs should never make up more than 60% of your fleet.
Partial upfront RIs
Advantages of partial upfront RIs:
- They present the best value for the most recent generation of RIs, such as r5.
- They provide an additional 5-12% discount compared to the same type of no upfront RI.
- Common instance types, such as m4, can be easily sold in the Marketplace.
- Should AWS lower their prices, it is still possible to sell partial upfront RIs in the Marketplace.
Limitations of partial upfront RIs:
- Upfront cash requirement can represent anywhere from 30 – 50% of the total RI value.
- For current generation instances, the additional savings is less compelling compared to the upfront payment required.
- They are not recommended at all for database workloads with SQL Enterprise. They are usually not recommended for SQL Standard.
- AWS charges a fee in the Marketplace at 12% of the sale price, which can lower your margins.
What are the cost differences between 1 and 3-year term plans?
Longer term commitments yield larger discounts. However, frequent pricing changes and release of newer generation instances, can easily eat into your savings. This can be mitigated by constant monitoring and optimization. Generally, a 3-year Reserved Instance term may be more suitable for large enterprises with sizable workload requirements.
AWS Pricing with Volume-based Discounts
AWS also offers volume discounts on upfront fees and hourly fees for future purchases, as illustrated below.
The Parquantix AI solution calculates the best Reserved Instance payment option and RI mix based on your application needs and business requirements. The tool automatically updates its algorithm with every price change and new instance upgrade, in real time, to optimize your cloud deployment and maximize your savings.