Definition: AWS pricing model based on a 1 or 3-year usage commitment that offers significant discounts compared to on-demand pricing.
— Source: NERVICO, Product Development Consultancy
What are Reserved Instances
Reserved Instances (RI) are an AWS pricing model that offers discounts of up to 72% compared to on-demand pricing in exchange for a 1 or 3-year usage commitment. They are not physically different instances, but a billing discount that is automatically applied to on-demand instances matching the reservation attributes: instance type, region, operating system, and tenancy. RIs are available for EC2, RDS, ElastiCache, OpenSearch, and Redshift.
How It Works
When purchasing a reserved instance, you select the instance type, region, term (1 or 3 years), and payment option: all upfront (maximum discount), partial upfront, or no upfront (minimum discount). AWS automatically applies the discount to any running instance matching the reservation attributes. Standard RIs offer the highest discounts but do not allow changing the instance type. Convertible RIs allow modifying the instance family during the commitment period in exchange for a lower discount. If the reserved instance is not utilized, the cost is still incurred.
Why It Matters
For stable and predictable workloads running 24/7, such as production databases or application servers, on-demand pricing represents an unnecessarily high cost. Reserved instances allow significantly reducing the cloud bill with a reasonable commitment. In a mature FinOps strategy, RIs cover the stable base load while on-demand and spot instances absorb peaks. This combination can reduce total compute costs by 40% to 60% without sacrificing flexibility.
Practical Example
A SaaS company with 20 EC2 m6i.xlarge instances running continuously for its production API pays $140,160 annually at on-demand pricing. The FinOps team analyzes usage and confirms these instances have been running uninterrupted for 18 months. They purchase 20 standard 3-year RIs with all upfront payment, reducing the cost to $52,560 annually, a 62% savings. The $87,600 annual savings is reinvested in serverless services for variable workloads.