Reserved Instances Shouldn't Give You Cold Feet

Keeping costs under control as your cloud infrastructure scales is no easy feat. To balance the two challenges, Reserved Instances provide substantial cost and capacity benefits. Their pricing discounts can even "float" across accounts that are linked to the consolidated bill to get the most of our your investment.

Afraid of Commitment? Don't Be.

Although many fear overcommitting to Reserved Instances, a 1-year term reservation will almost always break even after 6 months. This is the point at which you can stop using that instance and still benefit from the reservation’s pricing discount. For a 3-year reservation, this break-even point typically occurs around 9 months.

With that said, if you're worried about your usage needs changing down the road, it's easy to determine whether reservations can still be more cost-effective than on-demand pricing. If all that concerns you is the instance type or availability zone, AWS makes it simple to modify reservations. In the worst case scenario, you could always sell them on the Reserved Instance Marketplace, provided you have a US bank account.

Pay Attention to the Payback Period

Taking this into consideration, the cost benefits become very apparent to organizations with infrastructure that is always-on. Using the effective rate formula we can easily calculate the exact number of months at 100% usage we need before we receive a price benefit. We call this the payback period. This metric is invaluable for mitigating the risks of reservations by identifying how long you must actually use them before they break even. It’s calculated by comparing the cash outlay for on-demand usage and the proposed offering over each month in a term, and then identifying the month at which the cost for the on-demand instance usage exceeds the cost for the reserved offering. There is no payback period for a no-upfront reservation, since they are less expensive than on-demand immediately.

Let’s take a look at just how cost-effective reservations can be over time. With a 1-year upfront reservation for an m3.large instance in the us-east-1a region you can expect to save 37% per month!

effective rate = upfront payment / reservation term / interval + recurring usage charges for interval

While the effective cost per month savings are certainly significant, let's take a look at one of the more confusing behaviors of RI's - their ability to "float" across accounts.

What Happens When My Reservations “Float”?

By default, reservations have a tendency to satisfy the needs of the account in which they were purchased. However, if there is no instance usage in a given hour in the purchasing account, the reservations can “float” to a linked account to take advantage of the reservation.

While the price reduction benefits of RIs “float”, it’s important to note that the capacity reservation does not. Therefore, if you have an available reservation in account A but want to launch an equivalent instance in account B, you have no guarantee that sufficient capacity will be available.

Stay tuned for the next post on the best practices of RI management - from modeling purchases to modifying them and beyond.