AWS EC2 Pricing and Best Practices: The Complete Factsheet on Price Reduction and Cost Optimization

For the uninitiated, AWS recently announced a price reduction on its compute instances.  The most significant part of the AWS cost reduction announcement is the new three-year no-upfront Standard RI.  As an AWS user, you must understand the price reduction completely and learn how to make better use of reduction in AWS EC2 pricing and reap the most of it by EC2 detailed monitoring. 

However, before we directly get the price reduction, let’s start with AWS EC2 Instance pricing with the real fact sheets.  

AWS EC2: Four-way Pay and Usage

“Pay-as-you-go” is the fundamental of AWS pricing and this applies very well to the AWS EC2 pricing. You use the computing resources as you want, and pay only for what you use. This unique proposition has been the win-win for both the customer and AWS making it the market leader in cloud computing infrastructure.

There are four ways to pay for AWS EC2 instances: On-Demand, Reserved Instances, Spot Instances, and Dedicated Hosts.

Let’s analyze these offerings in detail before we start price reduction and optimal usage of the various AWS EC2 products.

On-Demand instances

AWS EC2 On-Demand instances enable you to pay for computing capacity by the hour. There are no long-term commitments or upfront payments. You pay only for the specified hourly usage of the instances you have opted for, and can increase or decrease your computing capacity depending on the demands of your applications.

On-Demand instances are highly recommended if:

  • You prefer the low cost and flexibility of AWS EC2 without any upfront payment or long-term commitment.
  • You have applications with short-term, spiky, or unpredictable workloads that cannot be interrupted.
  • Your applications being developed or tested on AWS EC2 for the first time.

On-Demand Pricing

EC2 On-Demand Pricing lets you pay for compute capacity by the hour with no long-term commitments.

If you really want to free yourself from the costs and complexities of planning, purchasing, and maintaining hardware, you must go for AWS EC2 On-Demand instances. This offering transforms large fixed costs into much smaller variable costs.

Spot Instances

AWS EC2 Spot instances allow you to bid on spare AWS EC2 computing capacity for up to 90% of the On-Demand price.  You get access to unused AWS EC2 instance capacity at discounts relative to On-Demand instance prices. It’s like a bid where, the Spot instance price fluctuates based on the supply and demand of available unused AWS EC2 capacity.

Spot instances are recommended if:

  • You have applications that have flexible start and end times.
  • You have applications that are only feasible at very low compute prices.
  • You need compute capacity urgently for large amounts of additional capacity.

Spot Pricing

In a Spot instance bid, you specify the maximum Spot price you are willing to pay. Your Spot instance is launched when the Spot price is lower than the price you specified, and will continue to run until you choose to terminate it or the Spot price exceeds the maximum price you specified.

You will never be charged more than the maximum price you specified and while your instance runs, you are charged the Spot price that is in effect for that period.  If the Spot price exceeds your specified price, your instance will receive a two-minute notification before it is terminated, and you will not be charged for the partial hour that your instance has run.

Reserved Instances

AWS EC2 Reserved instances provide you with a significant discount (up to 75%) compared to On-Demand instance pricing. Reserved instances also provide a capacity reservation, if assigned to a specific Availability Zone, thereby ensuring your ability to launch instances when you need them.

AWS EC2 Reserved instances come handier when you have applications that have steady state or predictable usage, and provide significant savings compared to using On-Demand instances.

Reserved Instances are recommended if:

  • You have applications with steady state usage.
  • You have applications that may require reserve capacity.
  • You are a committed customer for a one year or three year term.

Reserved Pricing

There are two types of Reserved pricing models for AWS EC2 Instances: Standard Pricing and Convertible Pricing.

The Standard pricing model enables you to purchase reserved instances for a one-year or three-year term and offers significant discounts (up to 75%) compared to On-Demand instances. You have the flexibility to change the Availability Zone, the instance size, and networking type of your Standard Reserved Instances.

The Convertible pricing model suits best if you need additional flexibility, such as the ability to use different instance families, operating systems, or tenancies over the Reserved Instance term. Convertible Reserved Instances provide you with a significant discount (up to 45%) compared to On-Demand and can be purchased for a 3-year term.

Reserved Instance Payment Options

There are three payment options for you to choose when you purchase Standard or Convertible Reserved Instance:

  • No Upfront—discounted hourly rate for every hour within the term, regardless of usage. No upfront payment is required. For Standard Reserved Instances, this option is only available as a 1-year reservation. For Convertible Reserved Instances, the option is available as a 3-year reservation.
  • Partial Upfront—pay a portion of the cost upfront and the remaining hours in the term are billed at a discounted hourly rate, regardless of usage.
  • All Upfront—Full payment is made at the start of the term, with no other costs incurred for the remainder of the term regardless of the number of hours used. This option provides you with the largest discount compared to On-Demand instance pricing.

Dedicated Hosts

A Dedicated EC2 Host is a physical AWS EC2 server dedicated for your use. Dedicated Hosts address your compliance requirements and reduce costs by allowing you to use your existing server-bound software licenses.

You can purchase Dedicated Hosts on hourly on-demand basis and as a reservation for up to 70% off the On-Demand price.

Dedicated Hosts are recommended if:

  • You have to launch AWS EC2 dedicated instances on physical servers for your use.
  • You require additional visibility and control over how instances are placed on a physical server.
  • You have to consistently deploy your instances to the same physical server over time.
  • You have existing server-bound software licenses that need to be deployed on physical server and you have to address corporate compliance and regulatory requirements.

Dedicated Hosts Pricing

The price for Dedicated Hosts vary based on the instance family, region, and payment option that you choose. However, you pay only hourly for each active Dedicated Host, regardless of the quantity or the size of instances that you choose to launch on a particular Dedicated Host.  You are not billed for the usage of your instances!

You must choose the instance type configuration for the host when you allocate a Dedicated Host. This selection defines the number of sockets and physical cores per host, the type of instance and the number of instances you can run on each host. A Dedicated Host can support only one instance type at a time.

There are two pricing models for Dedicated Hosts: On-Demand Pricing and Reservation Pricing.

On-Demand Dedicated Hosts Pricing

In the on-demand pricing model for Dedicated Hosts, you pay for each hour that the Dedicated Host is active or allocated in your account. When you release the on-demand Dedicated Host, you also terminate the billing.

On-Demand gives you the flexibility to scale up or down without long-term commitments.

Reservation Dedicated Hosts Pricing

Just like the AWS EC2 Reserved Instances, the AWS EC2 Dedicated Hosts reservations also provide up to a 70% discount compared to the on-demand price.  

There are three payment options for you to choose when you purchase Reserved Dedicated Hosts.  

  • All Upfront —you pay for the entire Dedicated Host Reservation with one upfront payment. This option provides you with the largest discount compared to On-Demand pricing.
  • Partial Upfront —you make a low upfront payment and are then charged a discounted hourly rate for the Dedicated Host for the duration of the reservation.
  • No Upfront —you do not need to make an upfront payment and you get a discounted hourly rate for the duration of the term.

For complete AWS EC2 Dedicated Hosts pricing, visit the AWS EC2 Dedicated Hosts Pricing page.

Cost Estimation with AWS EC2 Instances

  1. So, you have got an idea of the various AWS EC2 instances and their pricing. What next? How would you estimate the costs for the desired instance type?

As an AWS EC2 user or one who is going to use AWS EC2, you are well aware the fact that AWS EC2 facilitates complete control of your computing resources.  “AWS EC2 changes the economics of computing by charging you only for capacity that you actually use” as stated in an Amazon Web Services pricing guide.

According to the latest AWS pricing guide, consider the following points when you estimate the cost of your AWS EC2 requirements:

  • Clock Hours of Server Time – Resource charges are applied when they are running. For example, from the time AWS EC2 instances are launched until they are terminated.
  • Machine Configuration – The physical capacity of the Amazon EC2 instance you choose along with the AWS region, OS, number of cores, and memory.
  • Machine Purchase Type –On-Demand instances, Reserved Instances, Spot Instances, or Dedicated Hosts.
  • Number of Instances – Based on the number of instances that you want to provision to handle peak loads. You can have multiple instances of your AWS EC2 and Amazon EBS resources.
  • Load Balancing –Use an Elastic Load Balancer to distribute traffic among AWS EC2 instances. Calculate the number of hours the Elastic Load Balancer runs and the amount of data it processes to the cost.
  • Detailed Monitoring –Use Amazon CloudWatch to monitor your AWS EC2 instances. The default basic monitoring is enabled and available at no additional cost. You can opt for detailed monitoring for a fixed monthly rate. Partial months are charged on an hourly pro rata basis, at a per instance-hour rate.
  • Auto Scaling – Use Auto Scaling to automatically adjust the number of AWS EC2 instances in your deployment according to conditions you define. This service is available at no additional charge beyond Amazon CloudWatch fees.
  • Elastic IP Addresses – You can have one Elastic IP (EIP) address associated with a running instance at no charge.
  • Operating Systems and Software Packages – Operating System prices are included in the instance prices. These commercial operating systems require no additional licensing costs:
    • Red Hat Enterprise Linux
    • SUSE Enterprise Linux
    • Windows Server
    • Oracle Enterprise Linux

AWS has partnered with Microsoft, IBM, and several other vendors so you can run commercial software packages on your AWS EC2 instances (for example, Microsoft SQL Server on Windows, IBM Software). These costs need to be estimated. Also, for commercial software packages that AWS does not provide, such as nonstandard operating systems, Oracle Applications, Windows Server applications such as Microsoft SharePoint and Microsoft Exchange, you need to obtain a license from the vendors. You can also bring your existing license to the cloud through specific vendor programs such as Microsoft License Mobility through Software Assurance Program.

Save more than 50% on your cloud with smart RI planning.

Make Hay While AWS Drops Prices!

In May 2017, AWS announced significant price reductions on their EC2 instances. “As AWS grows, we continue to find ways to make it an even better value. We work with our suppliers to drive down costs while also finding ways to build hardware and software that is increasingly more efficient and cost-effective”, declares AWS’s chief evangelist in a blog post that announced the 61st price reduction.

AWS reiterates the fact that in addition to reducing the prices, they also give customers options that help them to optimize their use of AWS.

Let’s take a closer look at the May 2017 AWS EC2 price reductions:

  • New No Upfront Payment Option for 3 Year Standard RIsNo Upfront payment option with a 3 year term for C4, M4, R4, I3, P2, X1, and T2 Standard Reserved Instances.
  • Lower Prices for No Upfront Reserved Instances – lower by up to 17% prices for No Upfront 1 Year Standard and 3 Year Convertible Reserved Instances for the C4, M4, R4, I3, P2, X1, and T2 instance types, depending on instance type, operating system, and region.

An indicative chart for the estimated average reductions for No Upfront Reserved Instances for Linux in representative regions:

* US East (Northern Virginia) US West (Oregon) EU (Ireland) Asia Pacific (Tokyo) Asia Pacific (Singapore)
C4 -11% -11% -10% -10% -9%
M4 -16% -16% -16% -16% -17%
R4 -10% -10% -10% -10% -10%

*Source: EC2 Price Reductions – Reserved Instances & M4 Instances AWS Blog

  • Lower Prices for Convertible Reserved Instances –lower by up to 21% prices for 3 Year Convertible Reserved Instances for the C4, M4, R4, I3, P2, X1, and T2 instances.

Convertible Reserved Instances allow you to change the instance family and other parameters associated with the RI at any time; this allows you to adjust your RI inventory as your application evolves and your needs change.

An indicative chart for the estimated average reductions for Convertible Reserved Instances for Linux in representative regions:

* US East (Northern Virginia) US West (Oregon) EU (Ireland) Asia Pacific (Tokyo) Asia Pacific (Singapore)
C4 -13% -13% -5% -5% -11%
M4 -19% -19% -17% -15% -21%
R4 -15% -15% -15% -15% -15%

*Source: EC2 Price Reductions – Reserved Instances & M4 Instances AWS Blog

  • Lower Prices for M4 Instances –lower by up to 7% prices for M4 Linux instances.

As an AWS customer, you can use multiple strategies to purchase and manage your Reserved Instances. You may prefer to make an upfront payment and earn a bigger discount; or prefer to pay nothing upfront and get a smaller, but still substantial, discount. Else, make a partial upfront payment and a discount that falls in between the two other options.

All changes in prices and the reductions are already effective. So, why wait? Make the most of it…Now!

How to Further Save Costs?

Coming back to the actual business, the major driving factors of Amazon cloud computing cost of your AWS EC2 compute infrastructure should be the needs of your applications and how you intend to use the resources for optimal results. You no longer need to but the cutting edge physical hardware to provide computing. Instead, you are now using the flexible benefit of cloud computing by spinning AWS EC2 instances whenever you need those. Your computing infrastructure sizes to be a physical data center!

However, even on the cloud, without proper cost analysis, cost implementation, usage management, and resource optimization, you are running the risk of bottlenecking performance of your infrastructure both in terms of technical oversights and financial mismanagement. All that can happen due to mismatches in technical requirements and AWS EC2 resourcing.

To avoid all possible bottlenecks and to engage your resources properly, you need to understand the following key parameters:

  • How AWS users use and pay for EC2 instances
  • The different families and sizes of EC2 instances
  • How to identify opportunities to optimize EC2 instances

You can optimize your costs for AWS EC2 instances by purchasing EC2 Reserved Instances or Spot Instances. On-Demand instances are a good option if you run your Amazon EC2 Instances a couple of hours a day or a few days per week; however, if you plan to run your Amazon EC2 Instances more than that, Reserved Instances can save you money…etc…etc…

Sounds tough?

Botmetric Helps to Make the Right Directions

Facts are stated. Directions are set. Now, you must take right decisions on your AWS EC2 resources based on the facts, figures, and directions. Just to recap, you have a gamut of AWS EC2 instances to choose from, a set of AWS EC2 cost reduction and optimization guidelines to conform to, and a new set of AWS EC2 price reduction as a high level guidance. And you have the Botmetric’s analytical tools and expert analysts to help you out.