Whilst it’s impossible to predict the future, you may have some certainty about the IT infrastructure you know your business will need, regardless of change.
With this certainty, you can reduce your AWS bill through the purchase of Reserved Instances.
Reserved Instances are discount coupons that reduce the standard hourly rate for matching instances in your AWS account. “Matching“, because Reserved Instances can only be applied to AWS instances that have the same specific characteristics.
Your company needs to lease three cars, so you contact a car leasing company. You pick out the cars you need, and they give you an hourly rate for each. To work out your annual investment for each car, you multiply the hourly rate by the number of hours in a year.
“Wow“, you think to yourself. “These cars are expensive and we’ll need them for at least the next twelve months“.
You’ve always thought of yourself as a top negotiator, so you give the car leasing company a call. “If I commit to leasing each of these cars for at least a year, what sort of a discount can you give me?” (smooth).
The call centre agent waits for a moment, then speaks-up with the offer. “If you agree to pay for the entire commitment term up front…” he says, “… we’ll give you a discount on the hourly rate. The only condition is that you can’t take the discount for the red sports car and apply it to the yellow beetle.”
You’re very pleased with yourself. After the discounted hourly rate, you’re saving a total of $11,440 per year. Awesome! Now you can use this money to expand your fleet or grow other areas of the business.
To understand how Reserved Instances work, just replace a car from our analogy with an AWS Instance. Remember that with AWS, you pay an hourly rate for each service. With this in mind, if you can make a commitment to pay upfront for those services over a fixed term (1 or 3 years), AWS will give you a discounted hourly rate. This rate is applied to the whole term, saving you huge amounts on your total AWS spend.
There are two types of Reserved Instances that you can choose from, each with their own benefits and drawbacks:
The decision you make about which Reserved Instance to buy should be made on a per business system basis (eg: CRM, Email, File Server etc.). This is because each of your business systems has (or at least, should have) it’s own AWS Instance (eg: EC2, S3 etc.), and each AWS Instance can have it’s own Reserved Instance (discount) applied.
For each business system, ask yourself the following questions:
Armed with the answers to these questions, you can then determine which type of Reserved Instance is the right one for you.
Standard Reserved Instances are the most suitable option when you’re (almost) certain that your business system is unlikely to change and will remain on AWS for the coming twelve months (and beyond).
Convertible Reserved Instances are the most suitable option when you’re certain that a business system will remain on AWS, but uncertain that it will remain unchanged for the coming twelve months (and beyond).
For all Reserved Instances, you have the option of committing to 1 year (31,536,000 seconds) or 3 years (94,608,000 seconds).
Naturally, the 3-year commitment provides a larger discount and if you combine a longer commitment term with more of an up-front payment, you can save even more.
For all Reserved Instances, you have the option of choosing from three different payment options, as follows:
All discounts will appear as a “Billing Benefit” on your AWS bill.
The payment option you chose depends on a heap of variables. This said, let’s take a look at a few common scenarios to help you think it through:
You’re a small business that’s cash-flow sensitive and it’s your first year of using AWS.
Payment Option: No up-front payment. Make sure you only purchase Reserved Instances for AWS EC2 instances that you’re confident you need for at least the next 12 months. Since your overall AWS spend is likely to be low, the dollars you get back would be minimal if you were to select Partial Up-Front Payment or Full Up-Front Payment.
You’re a small business that’s cash-flow sensitive and you’re in your second or third year of using AWS.
Payment Option: No Up-Front Payment. The benefits of either of the other Payment Options likely don’t outweigh the benefits of having that cash-on-hand. Cash-flow is king.
You’re a small business that’s cash-flow sensitive and have an unusually large amount of AWS services.
Payment Option: Partial Up-Front Payment. Cash-flow is still critical, but with your larger AWS bill, the savings will be starting to add up.
Reserved Instances can give you a discount of 30% to 75% when compared to your typical bill. The precise amount will depend on the AWS service you’re using, the term you’re willing to commit to and the payment options you select.
Reserved Instances can be applied to individual accounts or a group of accounts that are consolidated under a master account.
Reserved Instances apply a discounted hourly rate to the full duration of your commitment term, regardless of whether your AWS services are used 24 x 7 or not.
This means that the fewer hours your AWS resources are online, the smaller the benefit. In some cases (particularly if you’ve made heavy use of the “Stop and Start” approach) it could even work out to be a complete loss.
It’s also important to understand that a coupon for one car model can’t be applied to another car model. If the coupon and the car don’t match, you’ll be wasting your money.
This is why – when it comes to Reserved Instances – it’s very important to understand two things:
Uh oh, you made a mistake and bought a Reserved Instance that you don’t need. In the US, there’s a Reserved Instance marketplace where you can sell your unwanted Reserved Instances to others (remember, they’re discounts, not computers).
In Australia, there isn’t much you can do, and the US marketplace only supports US bank accounts.
As of right now, AWS is working on rolling-out their Reserved Instance marketplace for other countries. When they do, you’ll have the ability to sell your Reserved Instances there.
In the meantime, you can call us at Tekspace or AWS themselves (or your preferred AWS partner). Whilst there aren’t any guarantees, there may be help available – particularly if your concerns are raised at the time of purchase or soon after.
Reserved Instances are for workloads where the utilisation of AWS resources – and the nature of those resources – is reasonably clear. Avoid using Reserved Instances for workloads that spike or are unpredictable. To optimise the cost of these workloads, consider the use of Auto Scaling.
AWS offers Reserved Instances because everyone wins.
You win because you’re getting a cheaper hourly rate that can be flexibly applied to multiple AWS EC2 instances.
AWS wins because they’ve just increased customer retention and lifted the predictability of their revenue and resource demands in a given region – which in-turn ensures they can fulfil the needs of their customers.