AWS Knowledge
Choosing a Payment Option for EC2 Reserved Instances
Piyush Kalra
Sep 2, 2024
Besides being a block of cloud computing, Amazon EC2 is also the largest spend on cloud services. Recently, in 2023, AWS announced that EC2 comprised a big portion of their annual revenue of $100 billion per year, positioning it as one of the drivers of cloud adoption across various industries. It has underlined how important it is to gain good reserved instance payment options for businesses.
It can be overwhelming to navigate the landscape of Amazon EC2 Reserved Instances, but choosing the right payment strategy can greatly bring your business to much more efficiency and profitability. We've compiled a comprehensive guide for just about anything you would want to know regarding EC2 Reserved Instances, so you're able to make informed decisions based on your current requirements and future projections.
There are three savings instruments for EC2:
New EC2 Reserved Instances (the focus of this guide)
EC2 Reserved Instances from the Marketplace
Spot Instances
What Are Amazon EC2 Reserved Instances (RIs)?
Amazon EC2 Reserved Instances (RIs) are designed for customers looking to utilize Amazon's Elastic Compute Cloud (EC2) for a specified duration, typically available through the EC2 marketplace. You can purchase EC2 RIs for terms of six months or two years, provided there is availability.
Worth noticing is the fact that the more a client commits to using these services, the more they are able to save in comparison to the On-Demand Instance pricing model. This makes RIs increasingly popular in any enterprise trying to balance out the cost of cloud services without affecting performance.
RIs also enable more predictable monthly cloud expenses because of the fixed price on each instance per month. Choosing the Right EC2 Instances The selection process involves the need to analyze your workload, its anticipated span of usage, and the breadth of your tasks regarding your pattern of use. For more detailed information, refer to our article on how to select the right EC2 Reserved Instances.
The Right Payment Method Is Very Important
When acquiring EC2 Reserved Instances, it is imperative to select a payment plan that will enhance the financial value derived from cloud infrastructure. For this purpose, Amazon offers All Upfront, Partial Upfront, and No Upfront payment alternatives without which the second option of renting would lack its usefulness. The payment option you choose can affect your cash flow, budget allocation, and overall savings. For example, to achieve maximum savings, one can choose to pay All Upfront. However, this involves huge amounts of cash at the beginning which probably may not be realistic in every organization. On the other hand, a no Upfront option helps avoid this initial cash burden but in certain situations proves to be more cost-effective.
Choosing the wrong option can result in wastage of money and resources or an acute shortage of resources encompassing the right choice that will reduce cost imposition without compromising your financial plan. The decision must take into account the current volume and behavior of usage of the company, plans for its growth, and its budget. Also, pay attention to how irreversible a commitment may be, and are there options for changing terms in the light of changing needs of the business or the situation in the market. This way of thinking will take care of ensuring that the investment in Reserved Instances pays off in the most optimal manner for the business.
To know more about EC2 instance types Pricing better, please go through our article to Understand the EC2 Pricing Example.
Understanding the Different Payment Plans
In this section you will explore Amazon Web Services, the personality topic and options for payment: all upfront, partial upfront and no upfront. Each one comes with advantages and is applicable to certain situations only.
All Upfront Payment
The All Upfront option requires the full upfront cost of the RI term at the time of purchasing. This is the option with the highest discount and will be most suitable for companies that have the funds required to invest in it. All payments are due during the first year, giving the largest discount on your Reserved Instances.
Examples of Instances and Savings:
t2.micro: Save up to 30% with All Upfront payment for 1 year or 40% for 3 years.
m5.large: Save up to 40% with All Upfront payment for 1 year or 50% for 3 years.
c5.xlarge: Save up to 50% with All Upfront payment for 1 year or 60% for 3 years.
Partial Upfront Payment
In this type of capacity reservation, the customer pays less upfront, deferring the balance of the cost for the term of the reservation through hourly billing at discounted rates. This provides a balance in optimizing and managing cash flow, including some upfront cash flow without having to pay fully at the beginning.
Examples of Instances and Savings:
A t2.micro instance can save around 30-50% with a partial upfront payment for 1 year or 3 years.
A t2.small instance may also offer similar savings, depending on the reservation terms for both 1 year and 3 years.
For more detailed information, check out EC2 Pricing Example
No Upfront Payment
In the No Upfront option, no initial payment is involved; instead, during the reservation period, you pay for an hourly rate that is already at a discount. This provides the least discount but gives more flexibility to businesses in terms of managing their finances. It is ideal for those on tighter budgets or who are wary of large upfront investments.
Factors to Consider When Choosing a Payment Option
Some considerations need to be made in order to select the most appropriate payment plan as relates to the business operations and the available finances.
Usage Predictability: Where your usage patterns are consistent and can be predicted well, assuming All Upfront or Partial Upfront Plans is rewarding. But where the usage is not constant, No Upfront seems to provide the required flexibility without a strain on finances.
Budget Constraints: What is the current budget and cash flow, if there is excess capital then All Upfront might be the most attractive option in terms of savings in the future. For people with average expenditure, Partial Upfront offers savings but does not damage finances too much. If you have a very strict budget and still want to take the advantages of RIs in costs, No Upfront is an option.
Long-Term vs. Short-Term Needs: Determine whether your needs are long-term or short-term. If you're confident about your long-term usage, All Upfront or Partial Upfront can be more cost-effective. For businesses unsure about their long-term requirements, No Upfront offers a safer, more flexible alternative.
The Financial Benefit of Each Plan: Analyze each plan for financial benefits. Use tools like the AWS Pricing Calculator to understand how the cost changes with respect to different terms and methods of payment. After all, calculate the TCO for each option to understand which plan offers the most considerable savings in light of particular usage patterns and financial goals.
Step-by-Step Guide on How to Choose and Purchase RIs with the Optimal Payment Option
Here's a practical guide to help you choose and purchase the right EC2 Reserved Instances with the optimal payment option for your needs.
Step 1: Assess Your Usage Patterns
First, find the historical, current, and future usage of EC2 resources. Identify the instances which are crammed and try to determine their usage trends.
Step 2: Determine Your AWS Budget
Can your business support a 1 or 3-year commitment to save significantly on AWS? Set a clear budget for your cloud expenses by deciding how much you're willing to commit upfront and how much you prefer to distribute over time.
Step 3: Evaluate Payment Options
Compare the three payment plans: All Upfront, Partial Upfront, and No Upfront. Using either the AWS Pricing Calculator, Pump Marketplace, or Vantage Marketplace to simulate the costs, showing you a chart of the possible savings of each option, carry out this exercise in class. The result of this exercise will be able to help you identify what is most valuable to you - the payment choice.
Step 4: Make Your Choice
Based on your usage patterns and budget, select the payment option that offers the best combination of savings and financial flexibility.
Step 5: Purchase Reserved Instances
Log in to the AWS Management Console. Navigate to the "Reserved Instances" section, and select the type and payment option of the RI you wish to purchase. Follow the prompts to complete your purchase.
Best Practices for Managing EC2 Reserved Instances
Following best practices can help you maximize the benefits of your Reserved Instances and ensure seamless integration into your cloud strategy.
Regularly Review Usage
Periodically revisit your usage of EC2 so that your Reserved Instances are aligned with your needs. Scale your RIs at any time, to avoid both underutilization and overcommitment. Of course, 30 days after buying EC2 RIs, you are also free to sell them on the marketplace. At Pump, you can resell any unused or accidentally bought EC2 RIs to our customers-in a matter of seconds, without any work from your side!
Utilize AWS Tools
Leverage AWS tools, including Cost Explorer, Trusted Advisor, and the Coverage + Utilization Report, to plan, manage, and optimize RI utilization. These tools provide insight, actionable recommendations, and guidance toward better cost efficiency for customers.
Combine RIs with Savings Plans
Consider combining Reserved Instances with AWS Savings Plans to achieve further flexibility and savings. Savings Plans can complement your RIs by covering the additional usage and further discounts to ensure SP coverage and EC2 coverage are considered separately.
Conclusion
Choosing the right payment option for your EC2 Reserved Instances boils down to cloud cost optimization and investment alignment to meet your business needs. Overall, the decision-making process can quite often become overwhelming due to three different types of payment plans that are All Upfront payment options, Partial Upfront payment options, or No Upfront payment options. That is why it's so important to weigh not just the immediate financial implications of each option, but how they fit into your broader organizational strategy.
But with Pump, you don't need to worry about that unless you want to! We can buy the EC2 Reserved Instances you use for free and sell them if you no longer need them. Pump is free, carries no risk, and we provide recommendations to help you maximize your savings!
Join Pump for Free
If you found this post interesting, consider checking out Pump, which can save you up to 60% off AWS for early-stage startups, and it’s completely free (yes, that's right!). Pump has tailor-made solutions to take you in control of your Amazon EC2 cost and all other AWS spend in an effective way. So, are you ready to take charge of cloud expenses and maximize the most from your investment in AWS? Learn more here.
