What are the Amazon EC2 Pricing Models? (2024)

AWS has maintained the largest cloud market share for well over a decade, and for good reason.

How can you take advantage of all the benefits of AWS, without running up a bill that’ll break the bank?

In this article, I'm going to talk about AWS pricing models. I will highlight the key AWS pricing principles to follow, and demonstrate how to choose the right model for your business.

With Amazon EC2, you pay only for the compute time that you use. Amazon EC2 offers a variety of pricing options for different use cases. For example, if your use case can withstand interruptions, you can save with Spot Instances. You can also save by committing early and locking in a minimum level of use with Reserved Instances.

Category 1: On-Demand

The first one and the one that most people are familiar with is called On-Demand. What that means is that you only pay for the duration that your instance runs for. This can be per hour or per second, depending on the instance type and operating system you choose to run. Plus, no long-term commitments or upfront payments are needed. This type of pricing is usually for when you get started and want to spin up servers to test out workloads and play around. You don't need any prior contracts or communication with AWS to use On-Demand pricing. You can also use them to get a baseline for your average usage, which leads us to our next pricing option, Savings Plan.

On-Demand Instances are ideal for short-term, irregular workloads that cannot be interrupted. No upfront costs or minimum contracts apply. The instances run continuously until you stop them, and you pay for only the compute time you use.

Sample use cases for On-Demand Instances include developing and testing applications and running applications that have unpredictable usage patterns. On-Demand Instances are not recommended for workloads that last a year or longer because these workloads can experience greater cost savings using Reserved Instances.

Pros

• There’s no long-term commitment for using EC2 instances.
• AWS only charges for the actual usage hours.

Cons

• Most expensive option.
• Not suitable for long-running production instances

When to Use

• Short-term projects or PoCs.
• Non-production workloads.
• Assessing unpredictable workloads.

Category 2: EC2 Savings Plans

Savings Plan offers low prices on EC2 usage in exchange for a commitment to a consistent amount of usage measured in dollars per hour for a one or three-year term. This flexible pricing model can therefore provide savings of up to 72% on your AWS compute usage. This can lower prices on your EC2 usage, regardless of instance family, size, OS, tenancy, or AWS region. This also applies to AWS Fargate and AWS Lambda usage, which are serverless compute options

AWS offers Savings Plans for several compute services, including Amazon EC2. Amazon EC2 Savings Plans enable you to reduce your compute costs by committing to a consistent amount of compute usage for a 1-year or 3-year term. This term commitment results in savings of up to 72% over On-Demand costs.

Any usage up to the commitment is charged at the discounted Savings Plan rate (for example, $10 an hour). Any usage beyond the commitment is charged at regular On-Demand rates.

Pros

• Easy to manage in comparison to Spot and Reserved Instances
• Can achieve a discount of up to 72%
• Predictable expenses for long-term usage

Cons

• Like Reserved Instances, customers need to make a long term commitment
• Excess usage above the hourly cap are charged at an On-Demand rate

When to Use

• Workloads are predictable, continuous and guaranteed to remain under a threshold.
• For workloads running on EC2 nodes, Fargate clusters or through Lambda functions.

Category 3: Reserved Instances

Another option is Reserved Instances. These are suited for steady-state workloads or ones with predictable usage and offer you up to a 75% discount versus On-Demand pricing. You qualify for a discount once you commit to a one or three-year term and can pay for them with three payment options: all upfront, where you pay for them in full when you commit; partial upfront, where you pay for a portion when you commit; and no upfront, where you don't pay anything at the beginning.

Reserved Instances are a billing discount applied to the use of On-Demand Instances in your account. You can purchase Standard Reserved and Convertible Reserved Instances for a 1-year or 3-year term, and Scheduled Reserved Instances for a 1-year term. You realize greater cost savings with the 3-year option.

At the end of a Reserved Instance term, you can continue using the Amazon EC2 instance without interruption. However, you are charged On-Demand rates until you do one of the following:

• Terminate the instance.
• Purchase a new Reserved Instance that matches the instance attributes (instance type, Region, tenancy, and platform).

Pros

• There’s up to 70% discount for long term usage commitment.
• Predictable pricing.
• Customers are able to reserve guaranteed capacity.
• Easier to manage compared to Spot Instances.

Cons

• Reduced flexibility: if you don’t have instances to apply the RI, you still have to pay the price.
• Requires a long-term commitment.

When to Use

• Production applications with predictable, long-term usage.

Category 4: Spot Instances

The next option is Spot Instances, and they allow you to request spare Amazon EC2 computing capacity for up to 90% off of the On-Demand price. The catch here is that AWS can reclaim the instance at any time they need it, giving you a two-minute warning to finish up work and save state. You can always resume later if needed. So when choosing Spot Instances, make sure your workloads can tolerate being interrupted.

Spot Instances are ideal for workloads with flexible start and end times, or that can withstand interruptions. Spot Instances use unused Amazon EC2 computing capacity and offer you cost savings at up to 90% off of On-Demand prices.

Suppose that you have a background processing job that can start and stop as needed (such as the data processing job for a customer survey). You want to start and stop the processing job without affecting the overall operations of your business. If you make a Spot request and Amazon EC2 capacity is available, your Spot Instance launches. However, if you make a Spot request and Amazon EC2 capacity is unavailable, the request is not successful until capacity becomes available. The unavailable capacity might delay the launch of your background processing job.

After you have launched a Spot Instance, if capacity is no longer available or demand for Spot Instances increases, your instance may be interrupted. This might not pose any issues for your background processing job. However, in the earlier example of developing and testing applications, you would most likely want to avoid unexpected interruptions. Therefore, choose a different EC2 instance type that is ideal for those tasks.

Unlike Amazon EC2 Savings Plans, Spot Instances do not require contracts or a commitment to a consistent amount of compute usage.

Pros

• Cheapest pricing model with up to 90% off On-Demand pricing.
• Suitable for non-production workloads, or workloads that can regenerate data or reprocess from the point of termination.

Cons

• Your instance can be terminated unexpectedly if there is a higher bidder, if On Demand resource is required, or if the instance has restraints that can’t be met. Without proper planning, this can leave your application down.
• This can be complex to set up if you are just getting started with AWS.

When to Use

• These can be very efficient for applications with high fault tolerance, or transient workloads like CI/CD pipelines.

Category 5: Dedicated Hosts

And finally, we have Dedicated Hosts, which are physical hosts dedicated for your use for EC2. These are usually for meeting certain compliance requirements and nobody else will share tenancy of that host.

Dedicated Hosts are physical servers with Amazon EC2 instance capacity that is fully dedicated to your use.

You can use your existing per-socket, per-core, or per-VM software licenses to help maintain license compliance. You can purchase On-Demand Dedicated Hosts and Dedicated Hosts Reservations. Of all the Amazon EC2 options that were covered, Dedicated Hosts are the most expensive.

Increase Value for Money

You should start cost optimization as early as possible (before migrating the workload to AWS if possible).

One of the most important exercises is matching capacity with demand. AWS has recognized how fundamental this is and developed a number of monitoring tools to help you:

• AWS Cost Explorer Resource Optimization - Identifies underutilized EC2 instances. A tool that enables you to visualize, understand, and manage your AWS costs and usage over time. If you are considering your options for Savings Plans, AWS Cost Explorer can analyze your Amazon EC2 usage over the past 7, 30, or 60 days. AWS Cost Explorer also provides customized recommendations for Savings Plans. These recommendations estimate how much you could save on your monthly Amazon EC2 costs, based on previous Amazon EC2 usage and the hourly commitment amount in a 1-year or 3-year Savings Plan.
• RDS Idle DB Instances Check - Identifies DB instances with no connections over the past 7 days.
• S3 Analytics - Identifies infrequently accessed data to move to cheaper storage class.
• AWS Trusted Advisor - Fully managed service providing guidance on best practices (e.g., identifying idle load balancers and unassociated elastic IP addresses).

In addition to monitoring tools, AWS also provides tools that automatically take action to cut costs. These include:

• AWS Instance Scheduler - Configure start and stop schedules for EC2 and RDS instances. This can save costs for non-production systems.
• AWS Operations Conductor – Automate time or event based triggers for managing resources.
• AWS Auto Scaling - Monitor applications and automatically adjust EC2 capacity by spinning up or down instances.
• Amazon Data Lifecycle Manager - Automates the creation, retention, and deletion of EBS snapshots and EBS-backed AMIs.

Maximize the Power of Flexibility

Using a cloud provider like AWS gives you the flexibility to access the services you need - when you need them, only paying for what you actually use. AWS gives you the ability to adjust services to align them with your business and reduce costs. For example, you can add or remove new EC2 instances as your demand fluctuates, or move data to cheaper S3 storage classes when you see it isn’t accessed often. Another option is to take advantage of serverless or managed services instead of running your own infrastructure. This can be anything from Lambda functions to ECS/EKS clusters to Simple Queue Service.

Being aware of the adjustment options available and taking advantage of them to suit your applications is key to running a scalable business.

Useful Tools

AWS pricing models are complex enough, so manually estimating all the costs can not only be cumbersome, but also error-prone. Instead, you can make use of some AWS’s native tools to estimate costs, or create an expense budget. Here are some of these:

• AWS Pricing Calculator - Creates an estimate to fit your particular use cases. (https://calculator.aws/#/)
• AWS Cost Explorer - Easy to use interface for analyzing and visualizing costs and usage over time. (https://aws.amazon.com/aws-cost-management/aws-cost-explorer/)
• AWS Budgets - Set custom budgets that trigger alerts when cost or usage exceed a set amount. (https://aws.amazon.com/aws-cost-management/aws-budgets/)
• AWS Billing Alert - Can send you automated notification when the monthly bill goes above a set threshold.(https://docs.aws.amazon.com/AmazonCloudWatch/latest/monitoring/monitor_estimated_charges_with_cloudwatch.html)

Conclusion

I hope that this article has provided you with the information you need to choose a pricing model that will help you cut costs without compromising quality or reliability. Understanding the AWS pricing models and their suitability for various types of workloads allows you to strike the right balance between flexibility and cost.

The AWS pricing model you choose will depend entirely on your specific business needs.

For example, if you are testing a new application, starting with the On-Demand pricing model can give you flexibility to know what resources will be needed over a period of time. Once you have determined the usage profile, you can plan for long-term commitments and cost-saving techniques. If you have a highly fault-tolerant application that runs on a cluster of instances that can withstand losing a number of nodes unexpectedly, Spot Instances can be a great choice. There is no one-size-fits-all, and in most cases there will always be some level of trial and error.