Best Prices and Practices of AWS EC2: A Guide to Lowering Price and Enhancing Cost

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There are ways to lower your cost for the AWS EC2 service by Amazon
Strategies to decrease AWS EC2 price by inducing certain strategies.

If you don’t follow AWS news or updates, there was an announcement recently about how its compute instances are going to have a reduced price.

The cost reduction of AWS is pretty significant because there is a 3-year Standard Reserved Instance that is not upfront.  If you use AWS, then you must educate yourself on the price reduction so that you can utilize the AWS EC2 prices better and monitor EC2 thoroughly to gain the most that you can of it.

Prior to having a reduced price, we can begin with the pricing of AWS EC2 Instance and provide real-world factual details.

AWS EC2: Usage and Paying

One important aspect of AWS pricing is “pay-as-you-go,” especially AWS EC2 pricing. With this proposition, you only need to pay for the computing resources that you utilize. This is something that works out great for both AWS and the end user. For this reason, nothing else has been able to dominate the cloud computing infrastructure market like this.

Paying for AWS EC2 instances can be done in one of four ways: 1) On-Demand; 2) Spot Instances; 3) Reserved Instances; 4) Dedicated Hosts.

Ok, so if we take a closer look at the details of these offerings first.

On-Demand Instances

When you use AWS-EC2 On-Demand Instances, you can purchase computing capacity at an hourly rate. You do not need to pay upfront or make any long-term obligations. The amount you pay will depend on the number of hours that you spent using your chosen instances.

Your computing retention volume or capacity can rise or fall, depending on your applications’ demands.

It is good to have On-Demand instances if the following apply:

  • You don’t like making long-term obligations or upfront payments. Instead, you like AWS EC2 because of its flexibility and affordability.
  • The workloads of your applications are volatile and last for a short time only without any interruptions.
  • It is your first time to use AWS EC2 to test or develop your applications.

 Pricing of On-Demand Functionality

The pricing of EC2 On-Demand allows you to pay hourly for your compute capacity. There are no longstanding obligations or contracts. AWS EC2 On-Demand instances will benefit anyone who wants to lower the costs of buying and maintaining their hardware. Instead of having bigger fixed expenses, you have smaller variable expenses. 

Spot Instances

When you use the Spot Instances of AWS EC2, you are able to bid on extra computing capacity at a maximum of 10% less than the current On-Demand price. In other words, unused instance capacity of AWS EC2 will be accessible at discounted rates.

The unrestricted supply and demand of the extra AWS EC2 capacity influence the price of Spot Instances. Your bid should match the price depending on the current demand.

It is recommended to use Spot Instances if the following apply:

  • The start times and end times are flexible for your applications.
  • The feasibility of your applications requires extremely small compute prices.
  • You have an immediate need for computing capacity so that you can have a lot of extra capacity.

Spot Price

When you place a Spot Instance bid, the highest price that you’ll agree to pay must be specified. If the Spot price drops below your Spot Instance bid price, then your Spot Instance will start to run. The only way it will stop running is if the Spot price goes higher than your bid price or if you decide to end it.

The maximum amount you bid is the most you will ever be charged. As your Spot instance continues to run, the amount you get charged will be the current Spot price. Once the Spot price goes over your maximum bid price, a 2-minute notification will be sent to your Spot instance.

After those 2 minutes, it will be terminated. You won’t have to pay anything for the fraction of that hour in which the instance was running.

Reserved Instances

The reserved instances of AWS EC2 will give you up to a 75% discount versus the pricing of the On-Demand instances. There is a capacity reservation provided by the reserved instances too. This will guarantee that you can launch your instances at the appropriate times necessary.

Reserved instances are very helpful if you can predict the amount of usage of your applications. This will give you huge savings versus on the price versus the price of ON-Demand instances.

It is recommended to use reserved instances if the following apply:

  • There is a steady rate of usage for your applications.
  • Reserve capacity might be necessary for your applications.
  • You have been a loyal customer for between 1 to 3 years.

Reserved Pricing Model

Convertible Pricing and Standard Pricing are the two pillars of reserved pricing which pertain to AWS EC2 instances.

The basic pricing model allows for reserved instances to be bought at a term of either 1 year or 3 years. There are also discounts towards 75% offered versus the price of On-Demand instances. There is a lot of flexibility given too because you can modify the Availability Zone, the size of the instance, and the type of networking for the reserved instances.

If you want even more flexibility, then the convertible pricing criterion will work better for you. It will let you utilize various instance families, tenancies, or operating systems that surpass the term of the reserved instance.

You will get much bigger discounts with convertible reserved instances versus On-Demand Instances, as much as 45% off. You can also purchase convertible reserved instances at a term of 3 years.

Payment Plans for Reserved Instances

When you buy a convertible reserved instance or a standard reserved instance, you’ll have 3 payment choices to select from. They are as follows:

All Hourly

For the term you select, you pay an hourly rate that is heavily discounted. It doesn’t matter how much you use either. You won’t have to pay any money upfront. If you purchase standard reserved instances, you can only choose a 1-year reservation. If you purchase convertible reserved instances, only 3-year reservations are available.

Part Hourly / Part Upfront

No matter your usage, some of the cost will be paid upfront. A discounted hourly rate will be applied to the rest of the hours which exist on the term. You will be billed for these hours.

Upfront Only

As soon as you begin the term, you will pay the full price upfront. You won’t be charged anything else throughout the duration of the term. It doesn’t matter how many hours you use. The full upfront payment gives you the greatest discount on the price.

Dedicated Hosts

When you buy a dedicated EC2 host, you are basically buying a physical server of AWS EC2 which you can use exclusively for your activities. Dedicated hosts let you take advantage of your current server-bound software licenses to lower costs and satisfy your requirements of compliance.

Dedicated hosts are available on-demand at an hourly rate. You can also reserve them for as much as 70% less than the price of On-Demand.

It is recommended that you get a dedicated host if the following apply:

  • You must use physical services to run your AWS EC2 dedicated instances.
  • You need more control and visibility regarding the placement of instances on a physical server.
  • Your instances must be regularly deployed to one physical server as time goes on.
  • Your current server-bound software licenses must be on a physical server.
  • You need to satisfy certain corporate regulations and compliance requirements.

Dedicated Hosts Prices

Dedicated hosts are priced according to the instance region, instance family, and the method of payment that you select. For every dedicated host, you are only charged an hourly rate. It doesn’t matter how big or how many instances you select for your dedicated host. You will not be charged for instance usage.

During the dedicated host allocation process, you need to pick the instance configuration type to determine how many physical cores and sockets there will be for each host. It will also determine the number of instances and the type of instances that each host can run. Only a single type of instance can be supported at one time by a dedicated host.

Reservation Pricing and On-Demand Pricing are the pricing models for every dedicated host.

The Pricing Model of On-Demand Dedicated Hosts

For the time that you have an active dedicated host, you pay for this service on an hourly rate. This is the On-Demand pricing plan that can be used for dedicated hosts. As soon as your On-Demand dedicated host is released, the billing gets eliminated.

You will have more flexibility with On-Demand and there won’t be any long-term contracts or commitments either. 

The Pricing Model of Reservation Dedicated Hosts

The dedicated host reservations of the AWS EC2 are similar to the reserved instances because they both give a discount of up to 70% when compared to the price of On-Demand.

You can buy reserved dedicated hosts by using 1 of 3 different payment options. They are as follows:

All Hourly

You only pay a discounted hourly price throughout the rest of the term of your dedicated host reservation. Upfront payments do not need to be made.

Part Hourly / Part Upfront

You can make a small payment upfront. For the rest of your reservation’s term, you pay a reduced hourly rate.

Upfront Only

A single upfront payment will cover the purchase of your whole reserved dedicated hosting. You will receive the greatest discount using this payment option.

Go to the webpage entitled AWS EC2 Dedicated Hosts Pricing to learn about all the prices. 

AWS EC2 Instance Cost Estimation

You probably already know that AWS EC2 has their way of facilitating all the control and management of your computing capacity. In other words, AWS EC2 only makes you pay for your required capacity usage. This is all laid out in the pricing guide of Amazon Web Services.

When you want to figure out the cost estimate for your requirements of AWS EC2, the following information will assist you. It comes right from the Amazon Web Services pricing guide.

  • Keep Track of Service Time Hours – When resources are running, there are charges applied. If you launch AWS EC2 instances, you are charged up until the instances are eliminated.
  • The Configuration of the Machine – The chosen Amazon EC2 instance’s physical capacity, operating system, memory, region, and quantity of cores.
  • Type of Purchase for the Machine – Dedicated Hosts, Spot Instances, On-Demand Instances, or Reserved Instances.
  • The Quantity of the Instances – The instance quantity for handling peak capacity. You may have several instances of your resources for Amazon EBS and AWS EC2.
  • Balance of Load – Traffic can be spread throughout AWS EC2 instances with an Elastic Load Balancer. Figure out how many hours this balancer operates and how much data it is processing versus the current cost price.
  • Detailed Monitoring – AWS EC2 instances can be monitored with Amazon CloudWatch. The regular default monitoring is activated without having to pay anything extra. But if you want detailed monitoring, you can choose this option and pay a fixed monthly price. If you have partial months, then an hourly rate per instance is charged.
  • Automatic Scaling – The quantity of your AWS EC2 instances can be adjusted automatically using auto-scaling, depending on your defined conditions. Aside from the basic Amazon CloudWatch fees, you won’t need to pay anything extra.
  • Elastic IP Addresses – One running instance can have a single Elastic IP address without having to pay anything extra.
  • Software Packages and OS – The instance prices have the cost of the operating system already factored into them. Commercial operating systems like these don’t need any extra licensing costs: SUSE Enterprise Linux, Red Hat Enterprise Linux, Oracle Enterprise Linux, and Windows Server.

Amazon Web Services has a partnership with many vendors, including Microsoft and IBM. That way, commercial software packages like IBM software and Microsoft Windows SQL Server can be operated on your available AWS EC2 instances. Estimated costs are needed here. Of course, there are certain commercial software packages not provided by AWS.

Some of which include Oracle Applications, nonstandard OS, Microsoft Exchange, Windows Server, and Microsoft SharePoint. The good news is that you can purchase a license from the appropriate vendor so that you can use their software on AWS.

So If you have an existing license already, you can use it on the cloud by going through certain programs like Microsoft License mobility & Software Assurance.

AWS Price Reductions

Just one year ago in May of 2017, Amazon Web Services announced how they’re going to have much lower prices on their AWS EC2 instances. This was their way of bringing more value to customers in wake of AWS’s substantial growth.

Their collaboration with suppliers helps lower costs. Meanwhile, they are constantly working to develop software and hardware which is increasingly cost-effective and efficient.

Aside from lowering prices, AWS is giving more options to their customers. These options will assist them in enhancing their AWS usage.

Here are some more details about the price reductions for AWS EC2 that were seen in May 2017.

  • The option not to pay upfront for a standard 3-year term. This applied to the following standard reserved instances: T2, X1, P2, I3, R4, M4, and C4.
  • Reduced prices for reserved instances with no upfront payment option. 17% maximum reduction in prices for a 3-year convertible and 1-year standard reserved instances with no upfront payment. This applies to the following types of instances: T2, X1, P2, I3, R4, M4, and C4. This is dependent on the instance region, type, and operating system.

A chart which indicates the average projected price reductions for Linux reserved instances with no upfront payment option in representative areas.

  • Convertible reserved instances have reduced prices by as much as 21%. This applies to convertible reserved instances that have 3-year terms. These include the T2, X1, P2, I3, R4, M4, and C4.

With convertible reserved instances, you can alter the RI parameters and instance family whenever you want. That way, your RI inventory can be modified during the evolution of your application and your personal needs.

A chart which indicates the average projected price reductions for Linux Convertible Reserved Instances in representative areas.

  • M4 instances had reduced prices by as much as 7%.

There are many strategies for managing and buying reserved instances when you’re an Amazon Web Services customer. For instance, you might want the best discount available by paying upfront. Of course, if you choose not to pay upfront, your discount will be smaller. But you can come halfway by making a partial payment upfront. Then you’ll get a slightly higher discount.

Increase Cost Savings

Let’s talk about the business again. The main factors which influence your AWS EC2 infrastructure’s cloud computing costs are your application demands and your usage of the resources for achieving the best results. Thanks to cloud computing, you don’t need the most expensive physical hardware any longer.

You can just spin instances of AWS EC2 anytime you want. Make a physical data center out of your computing infrastructure.

Your infrastructure could suffer a bottlenecked performance from things like mismanaging the finances and technical oversights. That is why you must properly optimize resources, manage usage, implement costs, and analyze costs.

If you want to prevent bottlenecks from happening, your resources must be engaged in the right way. Gaining knowledge on these important parameters will help:

  • The way in which Amazon Web Services users utilize EC2 instances and pay for them.
  • The various EC2 instance sizes and families.
  • Locating opportunities to enhance EC2 instances.

If you buy Spot Instances or EC2 Reserved Instances, you can promote cost optimization for your AWS EC2 instances. For anyone who uses AWS EC2 instances for just a couple of days per week or a few hours per day, the best choice for them would be the On-Demand instances.

As for everyone else who wants to run their instances longer, the most cost-effective choice would be the Reserved Instances.

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