Reserved Instances are one of the most powerful tools that Amazon offers for lowering your cloud bill. To understand how they work, check out our AWS 101: Reserved Instances page.
If your company is buying Reserved Instances, you’re making a huge investment. This investment has the potential to save you a significant amount of money— but a misstep can rob you of any ROI, and even cost you desperately.
However, Reserved Instances shouldn’t be feared. It’s imperative that businesses looking to save money on their cloud bill familiarize themselves with RIs, which truly are the most significant cost saving tool that Amazon provides. They simply must do so carefully. When used correctly, RIs can produce truly invaluable savings; when used incorrectly, they can devastate your budget.
It’s first important to know the basics of RI application. Then, read on for the math of calculating Reserved Instance needs.
A Reserved Instance is a reservation of resources and capacity, for either one or three years, for a particular Availability Zone within a region. Unlike on-demand, when you purchase a reservation, you commit to paying for all of the hours of the 1- or 3-year term; in exchange, the hourly rate is lowered significantly.
Furthermore, when you purchase a reservation, you’re not just getting cost savings; you’re also reserving the capacity that you need in that particular Availability Zone.
Did You Know?
When people talk about Reserved Instances, they tend to focus on EC2. However, Amazon also offers reservations for databases and for CDN; it’s important to take the database side into account, as this is another easy source of cost savings.
The primary reason for making a reservation is that reservations feature substantially lower prices than On-Demand prices, which allows you to lower the cost of the resources you’re already using.
Reason 1: Savings
First, RIs are an excellent tool for cost savings; using them can lower the cost of resources you’re already using, by allowing you to pay a lower price upfront than the price you would pay on demand. There are more than 2,000 types of RIs, each with their own break even point— the point where you have gotten enough usage out of the reserved capacity to make up for the upfront cost you paid. You can save up to 65% by using an RI.
Question: How do you define utilization rate?
An instance is being utilized when it is in a running state. As such, an annual utilization rate of 20% for an instance reflects that 20% of the hours of the year, this instance, or an instance that meets the appropriate criteria, was running. An RI can only be applied to a running instance.
Reason 2: Reserving capacity
The second reason primary reason for making a reservation is to reserve capacity in your chosen Availability Zone.
Instances on AWS are divided across several geographical areas, called regions. The west coast of the US, for example, has two regions: US-West-1, in Northern California, and US-West-2, in Oregon. Each region contains several AZs, or Availability Zones, which are distinct locations within that region. AZs within the same region are connected through low-latency links, but each has its own power and cooling systems, and operates independently from other AZs.
Having capacity reserved in a specific Availability Zone can be particularly useful if your infrastructure uses autoscaling and frequently experiences spikes in usage.
Example: If you’re running a social networking app with most of your infrastructure in US-East 1A, you will hopefully begin to see massive spikes in usage as your app gains popularity or goes viral. Generally, your app would autoscale to suit these new needs. However, this won’t work if there’s no more available capacity in that Availability Zone. If you have a Reserved Instance in that AZ, that capacity is reserved and your crisis will likely be averted.
Although it is usually available for reservations, Amazon does not guarantee the capacity— it does, however, put you first in line.
Question: To what degree in a real world setting can capacity issues be a problem?
Amazon is good at staying on top of things, so it’s not frequent. The bigger issue is with apps that are incredibly spiky in usage; for example, those which may go from ten instances to 1,000 in order to handle some sort of peak demand. In cases where you’re looking at such a significant increase in usage, it’s important to ensure that you have some capacity reserved.
Reason 3: Failsafe for outages
The third reason for purchasing a Reserved Instance is a newer trend; businesses are beginning to reserve capacity in other regions just in case.
This would be useful if demand caused a run on capacity in a particular Availability Zone. In such a scenario, you may find yourself needing to move from US-east to US-west as a result of an east coast hurricane. If you’re in that boat, chances are that other people are too, and the result will be a sudden heightened demand for US-West. A reservation in US-east would save you a spot at the front of the line.
The cheapest way to use reservations this way is to have some All Upfront reservations sitting in US-West. You may be using them you may not, but it’s the cheapest available insurance policy to give you a leg-up if there’s ever a run on capacity.