Reserved vs on-demand: how to choose commitments using break-even analysis

Commitments can reduce cost, but only if you have sufficient steady utilization. Break-even analysis helps you decide where commitments make sense and where on-demand flexibility is worth it.

Step 1: Define what you are committing

• Scope: one service vs multiple, one region vs many.
• Term: longer terms usually discount more but increase risk.
• Payment: upfront vs partial vs no upfront changes cash flow (and effective rate).

A commitment decision is mostly a risk decision (stability) disguised as a pricing decision.

Step 2: Break-even intuition

Compare the effective hourly cost of a commitment to on-demand. The break-even point is the utilization where the committed option becomes cheaper.

• If commitment hourly is 60% of on-demand hourly, break-even utilization is roughly 60%.
• Below break-even, unused committed capacity becomes waste.
• Above break-even, you win by replacing on-demand with committed coverage.

Quick formula: break-even utilization ≈ committed effective rate ÷ on-demand rate.

Step 3: Model uncertainty (this is where most estimates fail)

• Utilization drops: rightsizing and autoscaling reduce baseline.
• Workload churn: new products shift usage to different shapes.
• Family/size changes: you may migrate to different instance families over time.
• Seasonality: peaks do not justify year-long commitments if troughs are low.

Worked example (spot the hidden risk)

If on-demand is $1.00/hour and your committed effective rate is $0.60/hour, the break-even point is ~60% utilization. If you expect 80% utilization, you likely win. If you expect 50% utilization after rightsizing and seasonality, you likely lose.

A practical workflow (how teams avoid commitment regret)

1. Measure baseline hours for 30–90 days (by region and instance family).
2. Exclude workloads you plan to migrate or resize soon (uncertain usage shouldn’t be committed).
3. Choose a conservative coverage target (for example, 30–60% of baseline), not 100%.
4. Review monthly: if coverage is stable, increase gradually; if not, stop and re-evaluate.

The goal is not “maximum discount” — it’s stable realized savings without locking the team into the wrong shape.

Validation checklist

• Use a representative 30-90 day window to compute baseline utilization.
• Model a downside scenario (for example, -20% utilization) and confirm you still win.
• Commit gradually: start with partial coverage and expand after you see stability.

Next steps

Sources

• Reserved Instances overview
• Savings Plans overview

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