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  • Blog February 20, 2020

    Demystifying Cloud Instances: On-Demand, Reserved, and Spot Instances on AWS

    3 Minutes Read

There’s no doubt that cloud computing can make your life easier and elevate your operation to new levels of productivity and scalability, but with all the benefits come pricing structures that can make your head spin. Just like with leasing or buying a home or vehicle, there are several options and payment plans available when accessing the cloud.

With the exponential growth in the cloud computing market, cloud vendors continue to add new instance options and discount opportunities to entice customers their way, with some options offering up to 85% savings. There is a time and a place for each different pricing option, and this blog will outline the three most common AWS EC-2 instance types and break them down in terms of price, commitment level, and accessibility.

Demystifying Cloud Instances-chart


On-demand is exactly what it sounds like—cloud computing available on-demand whenever you need it. This is the most expensive option and offers zero discounts, as you are paying for the convenience of powerful and scalable computing at any time and in any region. In times of extremely high demand there is a small chance you might not be able to access a server, but this is exceedingly rare. Once you start an on-demand instance, it is yours until you terminate it and there are no time limitations.

Reserved Instances

Reserved instances (RI) require a usage commitment in exchange for a discounted rate. Most RI contracts are for one-year or three-year terms, with discounts up to 65% off the on-demand rate for the longer commitment. Within the Reserved Instances landscape, there are several contract and payment options:

Payment Options:

  • All Upfront Payment: Pay the whole contract upfront, with no other costs or additional hourly charges incurred. This offers the steepest discount, but it’s important to be certain that you will use all of the RIs purchased in order to get your money’s worth.
  • Partial Upfront Payment: This option allows you to pay a portion of the cost in advance, and then the remainder is charged at a discounted hourly rate that is billed monthly.
    • 1 year: 50% now, 4% monthly
    • 3 year: 50% now, 1.5% monthly

  • No Upfront Payment: In this contract type, you pay a monthly fee instead of putting any money down. This option is only available to vendors with established billing history and offers the lowest discount rate.

Contract Options:

  • Standard
    • Availability Zone, Scope, Platform, and Instance Size can all be modified
    • The Instance can be sold on the RI Marketplace if unused

  • Convertible
    • You can exchange a Convertible RI for another one with different attributes
    • Convertible RIs cannot be sold on the Marketplace

Reserved Instances offer the benefit of knowing your instance is always available and ready for you, and of course the discounted price sweetens the deal. However, it’s important to consider the fact that once you sign up for Reserved Instances you are locked into a price, even if AWS reduces prices in the future or introduces a new instance type that might be cheaper or a better fit for your organization. If you are unsure of your cloud usage needs and unwilling to make a commitment, Reserved Instances might not be the best fit for your organization.

Spot Instances

Spot Instances (SI) are spare compute capacity in the cloud that is up for auction at heavily discounted rates. Cloud providers offer these instances whenever there are unused servers available, and if the timing aligns with your project needs you can save up to 90% off on-demand pricing. However, the pricing and accessibility of Spot Instances can be a bit confusing.

Spot Instance Pricing in a Nutshell:

To access Spot Instances, you first submit a Spot Request where you specify all of your instance needs (i.e. type, size, availability) and offer a bid price, which is the maximum amount you’re willing to pay. If your bid exceeds the current market price and an instance is available, you are able to purchase it for the current market price, so long as the price stays at that level. If your bid comes in lower than the market price, you are not able to use the instance. If you had originally started an instance but the market price changes to higher than your bid, your instance is terminated with only 2 minutes warning.

Because of the unpredictable nature and the potential for interruption, Spot Instances are best for quick tasks or spin-ups, but are not recommended for long, time-critical jobs.


Like most things in life and business, there is no one-size-fits all solution for cloud computing. Most organizations will use one or all three of these instance types at one point or another, as they each present unique benefits and drawbacks. Learn more about how to optimize your cloud costs in 2020 in this blog.

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