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Reserved Instances 101:

What They Are and How to Save Up to 72%

What would you say to saving up to 72% on your AWS bill?

With just how expensive AWS can get, you’d have to be crazy not to jump at that deal, and that’s exactly what AWS Reserved Instances propose to let you do. The trouble is knowing whether or not Reserved Instances are a good fit for your organization, and whether you could actually save that much with them.

We promise that it’s simple once you get through the initial information. That’s why today’s post will cover:

  • What are Reserved Instances?
  • Types of Reserved Instances
  • Pros and cons of Reserved Instances
  • Should you buy Reserved Instances?
  • How to earn money back on your RIs
  • How to predict the Reserved Instances you need 

Let’s get started.

What are Reserved Instances?

Source by Paul Downey, image used under license CC BY 2.0

Reserved Instances are discounts that can be applied to an EC2 instance once it has been set up. By telling Amazon that you’re going to use X instance (or an instance matching its specifications) for a long period of time, you’ll get a discount compared to the regular On-Demand pricing.

Think of them like money-off coupons that apply to specific products - the coupon by itself does nothing and is only worth what you could resell it for (more on that later), but by using it in conjunction with a product you can make a hefty saving.

Reserved Instances are made up of six elements. The first four are the specifications and terms of the instance that you’re reserving to get a discount. The last two are the amount of time you’re committing to using such an instance, and the price of the Reserved Instance itself, or, rather, the discount you will receive.

The relevant specifications are the instance’s OS, Availability Zone, tenancy, and type (class, memory, etc). This means that, once you purchase your Reserved Instance, you can’t apply that discount to an instance which doesn’t match those specifications. However, the discount is also not tied to a specific instance even after it’s been applied - you can take the saving off of one instance and apply it to another as long as the new instance matches the specifications.

In terms of time commitment, you’ll have to choose either a 1-or-3-year period to reserve. If that was it, then this would massively hamper the usefulness of Reserved Instances. After all, you don’t want to be locked into paying for something (even at a reduced rate) if you don’t know whether you’re going to be using it in 1-3 years’ time. All we can say is this; keep reading and you’ll see why that is almost a complete non-issue.

The final element of Reserved Instances is the discount that you’ll receive for committing to the above elements. This can be anything up to 72% compared to On-Demand (standard) instance pricing. However, it’s worth noting that Savings Plans tend to be cheaper than Reserved Instances on average, even those too offer up to a 72% saving versus On-Demand. The savings you get depend on the instance specifications and on how long you commit to its use.

Types of Reserved Instances

There are three types of Reserved Instances:

  • Standard Reserved Instances
  • Convertible Reserved Instances
  • Scheduled Reserved Instances

Let’s take a look at each of these in turn.

Standard Reserved Instances

Source, image in the public domain

These are your regular old Reserved Instances. They work exactly as laid out above, so the only real key here is to remember that they aren’t tied to a specific instance, but are more of a discount you can apply to a matching instance.

This means that you can even earn some money back by selling on the remainder of your Reserved Instance if you don’t need to use any instances which it would apply to anymore. Again, more on that later.

Standard Reserved Instances offer up to a 72% discount versus On-Demand pricing. You also have three different options for upfront payments to make paying for them a little more flexible.

It’s worth noting that you can change some of the instance specifications of your Reserved Instance partway through its term. While this only applies to the OS, Availability Zone/Region, and instance size (within the same family and generation), this does give you a little extra flexibility in making use of your discount.

Convertible Reserved Instances

Convertible Reserved Instances are a little more complex. These are more flexible in that they allow you to change the instance type along with the tenancy, and/or OS your discount applies to, with the drawback that they offer lower discounts than standard RIs.

The only catch is that if you change the instance type, you must swap it with an instance type of equal value.

For example, as you can see in this comparison, a standard, 1-year, all-upfront RI for an m5.xlarge EC2 instance would save you 40% versus On-Demand pricing. The Convertible RI equivalent would only save you 31%.

Convertible Reserved Instances are thus better if you want to commit to using similar instances for a 1-3 year period, but have an AWS environment that’s subject to change. This lets you have some of the same discounts of regular RIs, but the flexibility to swap over to better (or cheaper) instances at will.

Since you can change out the instance types, this also means that you’re free to take advantage of new, more powerful instance types as they’re released while still paying less than On-Demand pricing.

Scheduled Reserved Instances

Source by ​​Marco Verch, image used under license CC BY 2.0

Scheduled Reserved Instances are, thankfully, less confusing than Convertible RIs. Scheduled RIs allow you to reserve instance capacity that is set to recur daily, weekly, or monthly. You can set the start time and duration for these periods (eg, committing to running instances for the first week of each month), and the commitment lasts for a full year. There’s no option to do this for 3 years.

However, it’s worth noting that you currently can’t purchase Scheduled Reserved Instances and that AWS does not have any plans to make them available in the future. As such, while it’s worth knowing what they are, we’re going to put them aside for the rest of this article.

Pros and cons of Reserved Instances

So, what do you need to consider when you’re thinking of purchasing Reserved Instances? Well, here are the pros and cons of them versus On-Demand plans for the same instances.

Advantages of Reserved Instances

As we’ve already demonstrated, the main advantage of Reserved Instances is that you can save a lot of money by using them. With savings of up to 72% versus On-Demand, that’s a huge amount of money that you can either save or re-invest in more AWS resources or other parts of your company.

Reducing costs like this can also be a great way to achieve the rule of 40 and prove that your company is capable of consistent profitable growth.

Speaking of costs, investing in a 1-3 year commitment to using a specific type of instance (or similarly priced instances with Convertible RIs) isn’t as much of a sunk cost as you might think.

The great thing is that your RIs retain their value after purchase, only depreciating as the time in their contract elapses. Since you can resell them once you no longer need them, you can earn at least some of their value back as soon as you recognize that you’re not benefiting from their discount anymore.

However, you always need to be aware of the downsides of RIs too…

Disadvantages of Reserved Instances

Source by John Voo, image used under license CC BY 2.0

Let’s get the two big downsides out of the way first. First, you can’t cancel a Reserved Instance once you’ve purchased it - it’s there until the time runs out. Second, you have to commit to a large amount of time, and can only choose 1 or 3 years as your term.

While the first of these is mitigated somewhat by the ability to sell on RIs that you don’t need anymore, there’s no avoiding that doing so will still lose you a certain amount of money. Earning back a portion of what the RI cost could completely overshadow what you spent in total compared to other options such as a Savings Plan or even a brief period of On-Demand pricing.

Plus, since the Reserved Instance marketplace is a bidding-based marketplace there’s no guarantee that you’ll sell it for what the remaining portion is worth.

Having to commit to 1 or 3 years is another major headache, as your AWS landscape can be prone to massive changes in a much shorter amount of time, depending on what kind of business you run and what stage said business is at.

Reserved Instances give greater rewards to those who use their instances more consistently, and for as close to 24/7 uptime as possible. If you’re not consistent in your usage and uptime, they might well not be the correct choice for you.

This is tied into what can be the big deal-breaker for anyone who’s on the fence about Reserved Instances. RIs charge you as if the instance it applies to is running 24/7.

Any discount versus On-Demand pricing assumes that you’re running that On-Demand instance 24/7 too. If you don’t need full and consistent uptime, this means that you’ll be paying for a huge amount of time that you wouldn’t be if using On-Demand, which can drastically reduce the amount you’re actually saving.

The other drawbacks are smaller, but nonetheless important to take into account.

For example, you’re not guaranteed to be able to sell your RI if you no longer want it. Every day you don’t manage to get rid of it is a day that’s subtracting from its market (resale) value. There’s also an (admittedly minimal) amount of effort in selling the RI which needs to be undertaken - you don’t just click a button and Amazon handles everything for you.

Speaking of which, it’s time to briefly cover how to sell your RIs.

How to earn money back on your RIs

Very quickly, let’s cover how to sell on Reserved Instances which you no longer need.

While there are a lot of fine details in terms of how to set up, access, and manage your listings, the sum of it is this. You can sell the remaining term of your Reserved Instances (if they have more than a month left) by going into the Reserved Instance section of your EC2 console.

You don’t have to worry about setting a price, as the console will automatically detect how much your RI is worth (to prevent artificial price inflation over their actual value) but you can list it at a discounted price if you wish. All you have to do is relinquish your rights to use the discount. Well, after making sure that you won’t be needing the RI anymore.

Source, image in the public domain

You won’t be able to use the RI for as long as it’s listed, and you will lose access to it completely upon its sale. This can take a while, as buyers will be automatically served RIs starting with the ones that have the lowest upfront cost - if you’ve put a higher upfront cost it’ll take some time to sell depending on the market’s supply and demand.

The only other thing to note is that your RI terms aren’t paused while they’re on the marketplace. This means that they’re losing value the longer that they remain unsold.

Finally, there is an option to go to a Reserved Instance broker who will handle the selling (and buying) for you. You’ll inevitably have a lower profit margin once their fee is deducted, but if you have literally no time to sell RIs yourself, it’s a reasonable option.

How to predict the Reserved Instances you need

As we’ve demonstrated by now, the key to making the most out of Reserved Instances is to know whether they’re right for you in the first place. To do that, you need to be able to predict which instances you’ll be using on an extended (and ideally continuous) basis.

You could use AWS’ Cost and Usage Reports to do this, but they often leave out vital contextual information and can be a nightmare to understand if you’re not thoroughly experienced with them. No, the best way to do this is with our AWS Spend Transparency Software.

Our tool shows you all of the information you need to quickly and easily learn what instances are costing you the most money, which have the highest usage, and you can even learn which ones are ideal for getting a Reserved Instance discount rate. After all, if you know that you’ve been running the same instance without any need for upgrades and constant uptime for the last 3 years, chances are that you can sit safely in knowing that committing to at least a 1-year RI will save you a lot of money.

Want to do even less work when calculating which Reserved Instances would serve you best, and how to get them as cheap as possible? Our Cost Reduction Assessment includes a model of your RI options, what the best selection for your setup would be, and we’ll even layer Savings Plans and potentially EDPs on top to present you with the best savings possible.

What are you waiting for? Start analyzing your AWS usage and spending effectively today.

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