Updated August 16, 2023

Amazon Web Services (AWS) cloud cost optimization is possible, and the organizations that comprehensively and proactively manage their AWS cloud environments get the most out of their investment. By adopting cloud financial management best practices, organizations can reap the benefits of elasticity, agility, security, and reliability that the AWS cloud has to offer.

Table of contents

1. What is AWS cost optimization?
2. How AWS pricing works
3. AWS cost optimization best practices
4. AWS cost optimization tools
5. AWS Savings Plans
6. Exploring reserved instances
7. Cost optimization requires constant attention and refinement

What is AWS cost optimization?

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AWS cost optimization works towards achieving the lowest prices for your workloads in the AWS environment. You can achieve cost optimization by implementing management systems to get the most out of your AWS spend. As you migrate your workloads to the AWS cloud, you should manage and track your usage and spending.

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Success in optimizing your cloud costs requires taking advantage of savings programs, such as AWS Savings Plans , as well as pairing your cloud workloads with the optimal instance and resource configuration.

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How AWS pricing works

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AWS bills are directly tied to usage, so it’s essential for organizations to manage how they use the cloud in order to optimize costs. Wasteful spending in AWS is often a result of mismanaged cloud resources (idle or unused) and a lack of proactive planning.

Specifically, there are three fundamental AWS cost drivers:

1. Compute. Charged hourly from the start of a compute request to its termination. This includes both CPU (central processing unit) and memory (RAM). For Amazon EC2—one of the most popular AWS compute services—you can choose from one of several pricing plans that can help you save money. For example, if you go with the EC2 savings plan, you commit to an hourly spend for a one- or three-year term for a specific instance family and Region (more on this later).
2. Storage. Charged by the amount of storage you need for data in the cloud. For one of its most popular storage services, Amazon S3, AWS offers different pricing tiers broken down into increments of terabytes (TBs). Economies of scale apply here, meaning the more terabytes you need to start with, the less you pay per gigabyte (GB).
3. Outbound data transfer. You’re also charged for data moving in between systems. There are exceptions for data transferred out to the public internet from S3, so be sure to check for those in your specific plan.

If you’re migrating to the cloud, also consider the inflated cost of managing two systems at once: your existing physical data center and your AWS environment. This inflated cost—known as the migration bubble—can add financial pressure to the initial switch to the cloud.

AWS cost optimization best practices

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These five foundational principles apply to almost all environments, regardless of your workload’s size. When getting started with cost optimization, consider the following strategies.

1. Select the right instance

Be sure to select the correct instance for the resources you’re actively using and the resources you plan to use. This way, you always choose the cheapest available instance that matches your specific needs. Analyze utilization of CPU, RAM, networking, and storage to identify which instances can be scaled down.

Narrowing down which instance to use can be tough, as AWS offers more than 300 different instances, each with different capabilities. Often, developers and cloud architects either select the wrong instance size or an instance with unnecessary or insufficient features for their particular workload. This leads to oversized instances, instances that are incompatible with the workload, and resources left running idle.

To avoid these pitfalls, it’s important to proactively monitor what resources you are and are not using, as well as rightsizing your infrastructure. Amazon CloudWatch can help you track metrics and set alerts, allowing you to respond in real time.

2. Increase elasticity

Increasing elasticity means being flexible with your application–having the ability to acquire resources as you need them and release resources when you no longer need them. Scaling out and scaling in, scaling up, and scaling down. Ideally, you want to monitor this varying workload automatically in the cloud.

Start by identifying which workloads have a variable load, determining workload range, and figuring out application limitations that may hinder elasticity. Further, pinpoint if increases in demand that may occur with events, webinars, and launches can be met by automatic scaling or if it must be put in place beforehand. Sometimes you may be able to reduce costs by using smaller instances for your workload rather than using fewer larger instances.

Monitor elasticity with tools like AWS Auto Scaling or Application Auto Scaling , which help track and schedule workloads.

3. Optimize storage

To optimize your spending, evaluate your storage usage monthly, making sure your storage is the right size and price. AWS offers multiple tools that can assist in monitoring storage costs, like AWS Budgets and AWS Cost Explorer . Additionally, you can utilize Amazon S3 object tagging, establishing an S3 lifecycle strategy to optimize data storage continuously.

The most commonly used storage option in the cloud is Amazon S3. It’s easy to use, offers virtually unlimited storage, and easily integrates with other AWS and third-party vendor services. However, be mindful that S3 comes in various storage tiers, so it’s important to monitor your S3 usage and select your storage tier based on your activity.

If you’re not quite sure, S3-Intelligent Tiering is your best bet. It automatically tracks your patterns and picks the best storage tier for your bucket.

4. Find the best pricing model for your needs

Once you’ve selected the right instance, increased elasticity, and optimized storage, you should turn your attention to selecting the pricing model that best fits your needs. AWS offers multiple pricing models , giving you options in finding the most cost-effective way to pay for your resources. You can choose from the following pricing models:

• On-Demand—The default pricing model, where you pay as you go. You pay a flat rate when you use resources and have no long term commitments.
• Spot
• Commitment Discounts—Reserved Instances/Capacity
• Commitment Discounts—Savings Plans
• Geographic Selection

Understanding these various pricing models will help you select the best option for your company’s unique needs. Tools like the AWS Cost Explorer and Trusted Advisor can help you make an informed selection, matching your specific requirements with the pricing selections that AWS offers.

5. Analyze, monitor, and adapt

It’s important to continuously measure and monitor your cloud environment, repeating each of these steps regularly so you can adapt to changes. Proactive planning, defining metrics, and analyzing cost allocation will help you achieve continuous optimization in AWS.

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AWS cost optimization tools

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In addition to following best practices, there are also tools you can use to help optimize your cloud costs. Some of these come directly from AWS, while others are third party tools made to give you a more holistic picture of ways to optimize your cloud spend. Let’s take a look at both categories.

AWS tools

• AWS Budgets: a billing service from AWS that lets you set custom alerts when your cost or usage exceeds your budgeted amount
• AWS Billing Conductor: lets you to manage and optimize your cost allocation, budgeting, and spending across your AWS accounts
• AWS Cost Anomaly Detection: identify and mitigate unexpected spikes in your AWS costs to help with cost optimization and budget control through spend anomaly detection and actionable insights
• AWS Cost Categories: get granular insights into your AWS spending by categorizing and organizing costs based on dimensions such as services, accounts, tags, and more
• AWS Application Cost Profiler: gain visibility into the cost drivers and inefficiencies of your multi-tenant applications, identify optimization opportunities, and make informed decisions
• AWS Purchase Order Management: a centralized place to manage and define your AWS purchase orders (POs) with invoice-matching rules
• AWS Billing Console: a centralized hub for managing your AWS bill, providing detailed insights, cost breakdowns, and usage analytics
• Reserved Instance (RI) Reporting: a reporting tool that lets you track how your organization uses your purchased RIs and see how eligible resources you use are covered by your RIs
• Customer Carbon Footprint Tool: related to one of the six Well-Architected Framework pillars, this tool lets you analyze, track, and forecast the carbon emissions from your workloads
• AWS Trusted Advisor: checks your AWS account for areas where you can make improvements (including security settings and usage data) and makes recommendations
• Amazon CloudWatch: creates dashboard visualizations of your AWS data and lets you set thresholds to trigger alarms and actions
• AWS Cost Explorer: lets you build custom visual reports to show your cost and data usage over time, making it easier to spot trends and anomalies in your cloud spend
• AWS CloudTrail: automatically enabled on your AWS upon creation, CloudTrail keeps track of all events in the Management Console, AWS Command Line Interface, and AWS DSKs and APIs to help you keep tabs on security risks and stay compliant
• AWS Cost and Usage Reports (AWS CUR): the most comprehensive source for cost and usage data, AWS Cost and Usage Reports give you access to granular, customizable reports that show estimated charges for your account
• Amazon S3 Analytics: also known as Storage Lens, this tool lets you create analytics dashboards to view storage usage and activity trends in addition to producing recommendations for cost optimization

Third party tools

• CloudZero: a cloud cost intelligence platform that brings together engineering and finance to show “cost per” metrics for items like microservice, environment, feature, and customer
• CloudHealth by VMware: platform for multi-cloud management that comes with useful features like budget management and forecasting, cost allocation and chargeback, commitment-based discount management, and more
• Apptio Cloudability: cloud management platform with features that run the gamut from cloud migration strategy to cost optimization
• CloudKeeper: built specifically for AWS, CloudKeeper is a cost management solution that provides spend evaluation reports, cost optimization recommendations, cost breakdowns, and more
• IBM Turbonomic: an application resource management (ARM) tool that automates compute, storage, and network actions to improve cost optimization

AWS Savings Plans

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Another way to optimize costs is by going with an AWS Savings Plan. AWS offers three types of Savings Plans:

1. EC2 Instance Savings Plans. Offers the greatest savings potential (up to 72 percent off On-Demand) on the condition that you must commit to a specific instance family in a chosen AWS Region. As the name implies, this plan only applies to EC2.
2. Compute Savings Plans. Offers the greatest flexibility, letting you choose from any instance family, Region, operating system, or tenancy. This plan also applies to AWS Lambda and AWS Fargate.
3. Amazon SageMaker Savings Plans. Offers savings of up to 64 percent off On-Demand pricing for SageMaker instances. This plan lets you choose from any instance family, size, Region, and component.

Instead of the usual On-Demand pricing, AWS Savings Plans operate on a flexible pricing model. This works by giving AWS customers the option to make a one- or three-year hourly spend commitment with usage measured by the hour. AWS advertises that customers can save up to 72 percent on compute workloads through a Savings Plan, with the price for usage remaining constant throughout your plan’s term.

You can use AWS Cost Explorer to get a recommendation on which commitment to go with (one or three years). From there, AWS lets you pay for the commitment in one of three payment options:

• All upfront
• Partial upfront
• No upfront

Savings Plans are flexible by design and let you convert what would normally be a variable cost to a fixed cost—something your finance team should be happy to hear. Keep in mind that, while Savings Plans are great, they aren’t a cure-all for cost optimization. You should continue implementing cost optimization best practices even if you go with a Savings Plan.

Exploring reserved instances

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A reserved instance (RI) allows you to pre-purchase compute capacity for Amazon EC2 instances or database capacity for Amazon RDS instances — with savings of up to 75 percent! By committing to a certain usage period, you can significantly reduce your AWS costs compared to pay-as-you-go pricing. Let’s dive into the details and explore how RIs can help you achieve optimal cost efficiency.

EC2 reserved instances

EC2 Reserved Instances are ideal for Amazon EC2 workloads that require a consistent and predictable level of compute capacity. There are two main types:

• Standard reserved instances. These offer the greatest savings and are suitable for applications with steady usage patterns over an extended period. They require a minimum commitment of one year, but you can choose to pay all upfront, partial upfront, or no upfront fees depending on your budget and requirements.
• Convertible reserved instances. With Convertible Reserved Instances, you gain flexibility and can modify the instance attributes such as instance type, operating system, and tenancy. This is particularly beneficial when you anticipate workload changes in the future. While the savings are slightly lower compared to Standard Reserved Instances, Convertible Reserved Instances provide more agility and adaptability.

RDS reserved instances

If you use Amazon Relational Database Service (RDS), RDS Reserved Instances can help you yield significant cost savings. These work similarly to EC2 Reserved Instances but are specifically designed for database workloads. Here’s what you need to consider:

• Instance Size Flexibility: RDS Reserved Instances offer greater flexibility in terms of instance size, allowing you to match your database requirements precisely. This enables you to optimize costs without compromising performance.
• Regional Coverage: RDS Reserved Instances are available across various AWS regions, giving you the flexibility to choose the most suitable region for your workload while still enjoying the cost benefits.

Cost optimization requires constant attention and refinement

AWS cost optimization requires an organized, disciplined approach, as well as a deep understanding of AWS functions and operations. As you move forward in your cloud journey, it’s in your company’s best interest to have expert cloud professionals on your team to assist in analyzing and monitoring your environment. If you find yourself in need of someone to fill that role on your team, NerdRabbit has you covered.

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