Understanding AWS Reserved Instances

If you’re using Amazon Web Services (AWS) for your cloud computing needs, you’re probably always looking for ways to optimize your costs. One of the most effective ways to save money on AWS is by using AWS Reserved Instances (RIs).

AWS Reserved Instances are a billing discount that can significantly reduce your EC2 costs in exchange for committing to usage for a 1 or 3 year term. By planning ahead and purchasing AWS RIs for the instance types you know you’ll need, you can save up to 72% compared to On-Demand pricing.

In this guide, we’ll dive deep into the world of AWS Reserved Instances to help you understand:

• What AWS RIs are and how they work
• The different types of AWS Reserved Instances available
• How to purchase and manage your AWS RIs
• Strategies for optimizing your AWS Reserved Instance usage to maximize savings

Whether you’re a seasoned AWS architect or just getting started with cloud cost optimization, understanding how to leverage AWS RIs is essential. Let’s get started!

Note:

We have compared saving plans and AWS reserved instances. You can discover the similarities and differences that Reserved Instances and Savings Plans share in this article Increase Cloud Savings: AWS Saving Plans or Reserved Instances.

What are AWS Reserved Instances?

AWS Reserved Instances are a billing discount applied to the use of EC2 instances in your AWS account. When you commit to a 1-year or 3-year term for a specific instance type and region, AWS provides a significant discount compared to running On-Demand instances. The savings can be up to 72% depending on the instance type, term length, payment option, and region.

Think of AWS RIs like buying a plane ticket. If you purchase well in advance and commit to specific travel dates, you usually get a much lower fare than if you were to book last-minute. Similarly, AWS Reserved Instances reward you with a discounted rate in exchange for committing usage for 1 or 3 years.

It’s important to note that AWS RIs are not physical instances, but rather a billing construct. When you purchase an AWS Reserved Instance, you are not actually buying a specific instance; instead, you are purchasing the right to launch instances of that type at a reduced cost for the duration of the reservation term.

How Do AWS RIs Work?

When you purchase an AWS Reserved Instance, you specify several attributes:

• Instance type (e.g. m5.large, c4.xlarge)
• Platform (Linux/Unix, Windows, RHEL, SLES)
• Tenancy (default or dedicated)
• Availability Zone (AZ) within a region
• Term (1 year or 3 years)
• Payment option (All Upfront, Partial Upfront, No Upfront)

Once you purchase the AWS RI, AWS will automatically apply the discounted rate to any running instances in your account that match the specified attributes, up to the AWS Reserved Instance capacity you purchased.

For example, let’s say you buy 2 AWS RIs for m5.large Linux instances with default tenancy in us-east-1a for a 1-year term. Now whenever you run m5.large Linux instances in us-east-1a, up to 2 instances at a time will be charged at the discounted AWS Reserved Instance rate instead of the On-Demand rate. If you run a 3rd matching instance, it will get the On-Demand rate until you either stop one of the first 2 instances or purchase additional AWS RI capacity.

One key concept to understand is that AWS Reserved Instances are automatically applied to any matching instances in the account in which they are purchased. You don’t have to explicitly launch instances as “Reserved.” AWS’s billing system will detect when you’re running instances that match your AWS RI attributes and will apply the reduced rate accordingly.

It’s also critical to know that you are charged for AWS RIs whether you actually run the instances or not. Essentially, you are paying for the option to run discounted instances, regardless of your actual usage. So it’s important to purchase AWS Reserved Instances only for instance types and configurations that you are confident you will use for the majority of the reservation term.

Benefits of Reserved Instances

The main benefit of using AWS Reserved Instances is the significant cost savings. By committing to a specific instance type for a 1 or 3 year term, you can save up to 72% compared to On-Demand pricing. This makes AWS RIs an excellent option for workloads that have steady-state or predictable usage.

For example, let’s say you normally run 10 m5.large EC2 instances 24/7 in the us-east-1 region. At an On-Demand rate of $0.096 per hour, this would cost about $8,400 per month. However, if you purchase 1-year All Upfront AWS RIs, the effective hourly rate drops to $0.044, reducing your monthly cost to around $3,850 – a 54% savings.

Besides the cost savings, another benefit of AWS Reserved Instances is the reserved capacity. When you purchase an AWS RI in a specific Availability Zone, you are guaranteed that Amazon EC2 will have the capacity available for your instance type when you need it.

Note:

Take a closer look at the approaches you can take to reduce RI costs in our other article How to Optimize Cloud Cost with AWS Reserved Instances.

Types of AWS RIs

AWS offers three types of Reserved Instances to meet different needs:

Standard AWS RIs

Standard AWS RIs provide the deepest discounts, up to 72% off On-Demand pricing, in exchange for the least flexibility. When you purchase a Standard RI, the instance type, platform, tenancy, and AZ cannot be changed during the term. If your needs change, you can sell the unused portion of a Standard RI in the Reserved Instance Marketplace.

Standard AWS RIs are best suited for steady-state workloads where the instance configuration is not expected to change. For example, a production database server that needs to run 24/7 on a specific instance type would be a good candidate for a Standard RI.

Convertible AWS RIs

Convertible AWS RIs are like Standard AWS RIs but with the added flexibility to change the instance type, platform, tenancy, and AZ at any time during the term. This allows you to adapt your RIs as your workloads evolve. The tradeoff for this flexibility is a smaller discount — up to 54% off On-Demand pricing. Convertible RIs cannot be sold in the RI Marketplace.

Convertible RIs are a good choice when you expect your workloads to change over time but still want to take advantage of RI savings. For example, you may want to purchase Convertible RIs for your development and testing environments where instance types may need to adjust as new projects and requirements emerge.

Scheduled AWS RIs

Scheduled AWS RIs are a unique type of RI designed for workloads that run on a predictable, recurring schedule. You can purchase capacity reservations in daily, weekly, or monthly increments over a 1-year term, with discounts of 5-10% depending on the total scheduled duration within the term.

Scheduled RIs are ideal for jobs like batch processing, ETL, and financial reporting that only need to run during specific time windows. For example, if you have a financial analytics job that runs for 4 hours every weeknight, you could purchase a Scheduled RI for those blocks of time and realize savings compared to running the job on On-Demand.

Regional Benefit

One useful feature of Standard AWS RIs is the regional benefit. If you purchase a Standard AWS Reserved Instance for a specific Availability Zone and that capacity is not available, the AWS RI discount will automatically apply to matching usage in another Availability Zone within the same region.

For example, let’s say you purchase a 1-year zonal m5.large Linux AWS RI in us-east-1a. If Amazon EC2 ever runs out of m5.large capacity in us-east-1a, the AWS Reserved Instance discount will apply to any m5.large Linux usage in other us-east-1 zones like us-east-1b or us-east-1c.

Modifying Reserved Instances

If your needs change, it’s possible to modify your Standard AWS Reserved Instances. Some of the modifications you can make include:

• Switching between Availability Zones within the same region
• Changing between EC2-VPC and EC2-Classic
• Changing the instance size within the same instance family

However, you cannot change regions, instance families, operating system, or tenancy. Convertible AWS RIs provide even more flexibility to change instance types.

RI Payment Options

AWS Reserved Instances offer three payment options to match different budgeting needs and discount preferences:

All Upfront

With the All Upfront option, you pay for the entire RI term (1 or 3 years) at the time of purchase. This provides the largest discount compared to On-Demand, but requires the highest upfront cash outlay.

Partial Upfront

The Partial Upfront option lets you pay a smaller portion of the RI cost upfront and the remainder in monthly installments over the term. The total discount is slightly lower than All Upfront but higher than No Upfront. Partial Upfront provides a balance of savings and upfront expense.

No Upfront

As the name implies, the No Upfront option requires no upfront payment and instead spreads the RI cost in monthly installments over the term. No Upfront offers the smallest overall discount but provides the flexibility of pure pay-as-you-go pricing combined with some level of savings.

Here are the effective hourly rate discounts for a sample m5.large 1-year RI in us-east-1:

Payment Option	Linux/Unix Discount	Windows Discount
All Upfront	42%	31%
Partial Upfront	38%	28%
No Upfront	35%	25%

As you can see, the discount level scales with the amount of upfront commitment, but even the No Upfront option delivers substantial savings compared to On-Demand. Your choice of payment option will depend on your available budget, accounting preferences, and overall cost optimization strategy.

Note:

AWS Reserved Instances are just one piece of the EC2 cost optimization puzzle. To dive deeper into Amazon EC2 best practices, be sure to check out our guide Exploring the Fundamentals of Amazon EC2 Instances.

Strategies for Optimizing AWS RI Usage

To maximize your savings with AWS Reserved Instances, consider the following best practices:

Analyze Usage Patterns

The first step in any RI purchase strategy is to thoroughly analyze your historical EC2 usage data to determine which instance types and configurations are the best candidates for reservation. AWS Cost Explorer and third-party cost management platforms like Binadox can help you visualize your usage trends and identify opportunities for RI coverage.

Look for instance types that have steady usage over long periods of time. Instances that run 24/7 or with very high daily utilization are prime RI targets. Avoid purchasing RIs for instances that are only used sporadically or unpredictably, as you may end up paying for capacity you don’t actually use.

Use a Mix of RI Types

For most AWS environments, it’s best to use a mix of Standard, Convertible, and Scheduled RIs to match your usage patterns. Standard RIs can cover baseline needs for unchanging workloads, while Convertibles can provide coverage for resources that are more dynamic. Scheduled RIs can give added savings for jobs that run only at certain times.

Some companies follow a “1 Year, Seasonal, Weekly” rule: Rely on 1-Year Convertible RIs for the bulk of long-term coverage. Add 1-Year Standard RIs to capture seasonal needs (e.g. holiday sales traffic). Then use Scheduled RIs to cover short-term weekly or hourly spikes.

The right mix will depend on the unique dynamics of your application. The key is to build an RI portfolio that closely matches your real-world usage at the lowest possible cost.

Use the AWS RI Marketplace

If you have RIs that are no longer needed, you can sell the unused Standard RIs in the Reserved Instance Marketplace. This allows you to recoup some of your investment and avoid wasting money on unneeded reservations.

When selling RIs, you set the price and retain ownership until the RI sells. If a sale goes through, you receive an upfront payment from the buyer for the remainder of the term. AWS charges a 12% service fee on the transaction.

You can also use the RI Marketplace to buy RIs at discounted rates from other AWS customers. This can be a way to obtain short-term RI coverage or to test out new instance types before committing to a long-term reservation.

Monitor RI Utilization

Regularly monitoring your AWS RI utilization is critical for ensuring you’re getting the expected savings. AWS provides the RI Utilization and Coverage reports in the Cost Explorer tool to show you how well your RIs align with your actual instance usage.

The RI Utilization report shows the percentage of your purchased RI time that was used by matching instances. A low utilization percentage indicates you’re paying for reservations that are going unused. Low utilization means you should consider modifying or selling RIs to better match your needs.

The RI Coverage report shows how much of your overall instance usage is covered by RIs. A low coverage percentage means that a high proportion of your instances are running On-Demand and you’re missing out on reservation savings. Low coverage means you should consider buying more RIs to increase discount levels.

Together, these reports give you the insights needed to optimize your RI usage. Aim for high utilization to avoid wasting reservation spend, and for high coverage to maximize savings versus On-Demand pricing.

Note:

Take a closer look at AWS Storage Services: S3, EBS, EFS to further optimize your cloud usage and costs. 

Conclusion

AWS Reserved Instances are a powerful cost optimization tool for businesses running applications on Amazon EC2. By committing to usage terms of 1 or 3 years, you can net substantial savings of 30-70% compared to On-Demand pricing.

The key to successful AWS RI usage is to choose the right mix of Standard, Convertible, and Scheduled AWS Reserved Instances to match your workload patterns. By analyzing your usage data, maintaining high AWS RI utilization and coverage, and taking advantage of the RI Marketplace, you can adapt your reservations as your needs change while ensuring you get the maximum possible savings.

No matter what your AWS environment looks like, taking the time to implement a well-designed AWS Reserved Instance strategy is sure to pay significant dividends. The savings can be reinvested into new projects, additional resources, or other areas of your business.

To learn more about AWS cost optimization best practices, be sure to visit the Binadox blog. We’re constantly publishing new guides, tutorials, and walkthroughs to help you get the most out of your cloud infrastructure while keeping costs under control. For example, learn more about AWS spot instances in AWS Spot Instances in Cloud Computing: Benefits and Pitfalls.