Reserved instances is a discount billing concept in which business can obtain significant discounts compared to standard “On Demand” cloud computing prices in return for committing to a specified level of usage. However, the terms under which a Reserved Instances discount is offered vary from provider to provider.
Reserved Instances is a simple concept to understand. You simply commit to how much compute capacity you need over a period of time, and qualify for a discount on the standard “On Demand” price. The amount of the discount varies according to the length of the commitment and—if an option to pay in advance exists—how much you pay in advance. You are then billed for the capacity you have reserved, rather than the capacity you provision on an instance-by-instance basis.
Financially, Reserved Instances can be of significant benefit to businesses with steady workloads. Savings in excess of 70 percent can be achieved, plus—because you are being billed for the capacity you have reserved rather than specific instances—you have the flexibility to alter instance sizes within the same family; or, if you have committed to a “Convertible” Reserved Instances discount option, alter instance types, operating systems, and tenancies.
A provider-by-provider guide to Reserved Instances
Amazon Web Services (AWS) offers the greatest variety of options by allowing businesses to commit to one-year or three-year terms, by offering discounts according to full prepayment, partial prepayment, or monthly payment, and by providing a choice of “Standard” Reserved Instances or “Convertible” Reserved Instances. The biggest discounts can be achieved by committing to Standard Reserved Instances for three years and paying the full amount in advance.
Microsoft Azure also offers a choice of one-year or three-year commitments, but not to all their Virtual Machine sizes. The entry-level A-series and A_V2 series are excluded, as are the high-end memory and storage optimized G-series. You also have to pay the full amount of your commitment in advance. However, Microsoft Azure VM Reserved Instances are fully convertible, and you can get a refund on your pre-payment if you cancel your commitment before the end of its term.
Google Cloud´s Reserved Instances program is called “Committed Use”. Again you have the choice of a one-year or three-year commitment, but you don’t have to pay anything in advance in order to take advantage of the discount. Committed Use Reserved Instances are just as flexible as Microsoft Azure´s VM Reserved Instances, but there are similar exclusions to what instances qualify for the discount and there is no option to cancel or resell unused capacity.
Alibaba Cloud has a different way of approaching committed use discounts—offering only pay-as-you-go and one-month prepaid subscription models. The monthly subscription model offers a substantial discount of between 30 percent and 60 percent on pay-as-you-go prices and could be of benefit to businesses that do not want to commit to one-year or three-year terms—with the caveat that smaller instance types share the underlying hardware resources in a potentially unpredictable manner.
When to purchase Reserved Instances
The time to purchase Reserved Instances is when the “payback” makes it financially worthwhile. If you are running Virtual Machines around the clock (i.e. 100 percent utilization), the payback is easy to calculate because a 50 percent discount on “On Demand” prices for a one-year commitment means you are effectively running the Virtual Machines free of charge for six months of the year.
However, if you are only running Virtual Machines from 9.00 a.m. to 5.00 p.m. Monday to Friday (24 percent utilization), you would have to get a discount in excess of 76 percent to justify the purchase of Reserved Instances. Of course, you can purchase Reserved Instances to meet some of your capacity requirements and use On Demand pricing the rest of the time. It depends what suits you best.
Rather than engage in complicated calculations in order to determine the right time to purchase Reserved Instances, you can use a cloud management solution such as CloudHealth to monitor the utilization of your resources and to make recommendations about when to purchase Reserved Instances. CloudHealth also delivers an operational and financial overview of Reserved Instance investments to ensure your purchases are fully optimized.
Want to know more about Amazon Reserved Instances?
Related reading:
Amazon Convertible Reserved Instance Exchanges Made Easy
