#03. How Does RIs and Saving Plans Work?

Understanding how Savings Plans and Reserved Instances work will help you make an informed decision on which to choose and when to use them.

You can quickly learn the difference between Reserved Instances (RIs) and Saving Plans using a generative AI tool (e.g., ChatGTP) or Google. But you need to understand how they are applied and charged before you purchase them. This article gives you an overview on that.

TL;DR;

With Reserved Instances (RIs), you purchase a specific number of reservations matching instances (i.e., same family, size, OS, tenancy …etc) in your accounts. Savings Plans (SPs), however, you are commitments to pay a fixed dollar amount hourly for a discounted rate for the duration of the term. For instance, if you're running $1/hour of on-demand EC2 and an SP offers a 50% discount, you'd need to purchase a $0.5/hour SP.
Both RIs and SP has a term of 1 or 3 years commitments.
The more specific the commitment, the higher the discount rate. (i.e., Standard RI > Convertible RI > Savings Plans)
RIs and SPs are available only in AWS and Azure. GCP uses a different commitment model knows as CUDs, which is discussed in another article.

General Differences

The names themselves provide insight into their nature. "Reserved Instances" imply a specific reservation, akin to booking seat 7B on flight NY213 from London to New York—you're committed to that exact seat, flight, and destination. In contrast, "Saving Plans" offer more flexibility. To extend the travel analogy, it's like having various options to get from London to New York. You might choose to fly or sail, and if flying, you could select from different routes, flights, or even airlines to reach your destination.

In both AWS and Azure, when using Reserved Instances, you must specify the instance type, operating system, region, and tenancy. Savings Plans, on the other hand, offer more flexibility. Depending on the cloud provider and the plan you choose, they may apply to all compute instances or even extend to different services. (Azure Savings Plans offer coverage to more services than AWS.)

Here is a general comparison

Clearly, there are significant differences in flexibility of use and service coverage (e.g., AWS ElastiCache, Redshift, and OpenSearch Service are only covered by RIs. On the flip side, Savings Plans cover services that RIs don't). But there is still one major difference: How are they applied?

How are the Reserved Instances and Saving Plans Discounts applied?

The difference how RIs and SPs are applied what makes this comparison interesting.

Reserved Instances

RIs ****(also known as Standard Reserved Instances or SRI) apply discounts to a service only when a running resource matches the RI specifications. Each reservation covers a single instance for a minimum of one year

To understand how RIs are applied, consider amortizing their value to each hour throughout the commitment term (i.e., 1 year or 3 years). Here's an insightful illustration from the Cloud FinOps 2nd Edition book about RIs:

Imagine a coupon book costing $750 with 30 meal coupons. Each coupon gets you a meal that would normally cost $50. That's $25 per coupon for a $50 meal, saving you $25 a day. If you dine at this restaurant daily, you save 50%. However, if you only use half the coupons, you've saved nothing. The sweet spot? Using more than half the coupons makes buying the book worthwhile.

Therefore, commitments make sense for stable workloads that are not turned off often since they usually come with the highest discount rates.

Convertible Reserved Instances

Some reservations are exchangeable for a less favorable rate. A feature called Instance Size Flexibility (ISF) allows the RI to apply discounts to different size instances in the same family (m5, c5, r4, etc.). A single large RI can apply discounts to multiple smaller instances, and a single small RI can apply a partial discount to a large instance

If you need some flexibility with your RI while still enjoying a relatively high discount, opting for Convertible Reserved Instances can be a sweet spot.

Saving Plans

SPs ****are a commitment to pay a dollar amount to get a discounted rate every hour for the duration of the agreement (minimum one year). Since SPs apply to a wide range of resources simultaneously, they always automatically prioritize resources with higher discounts until the full discount rate is exhausted. Any remaining usage is then billed at on-demand rates.

The cool thing about SPs, you can start with a very small commitment (e.g., 0.1$/hour) and increase it as you reach the optimal coverage and utilization. (Read my article about the Commitment Utilisation and Coverage for more details)

How Understanding Commitments Influence your Choice?

You don't have to choose one or the other—combining RIs and SPs usually yields the best savings. It's all about knowing what to apply where.

Apply Reserved Instances to stable workloads. For example, a production web application running on an EC2 instance that needs to be up all the time is ideal for RIs. However, beware of the trap of running instances 24/7 just because they're covered by a commitment. This contradicts the main point of FinOps: maximizing the business value of the cloud.

To illustrate, I've noticed that some organizations run their Virtual Desktops around the clock simply because they're covered by a commitment. In reality, these desktops might only be needed for 8 hours a day, 5 days a week. In such cases, an on-demand rate might actually be cheaper, or a Savings Plan could be applied, with the remaining hours covering other services.

Apply Savings Plans when you have a cloud resource portfolio that requires flexibility, especially when you're considering modernization. For example, if you started your cloud migration with a "lift-and-shift" architecture moving your existing data center into virtual machines, but you plan to eventually modernize applications into containerized environments or serverless architectures, then Savings Plans make absolute sense. They will apply discounts to all the services involved in your evolving infrastructure.

Convertible RIs offer a sweet spot between standard RIs and Savings Plans. They allow more flexibility than standard RIs, yet provide a better discount than Savings Plans.