Cloud Economics
AWS pricing philosophy, Total Cost of Ownership (TCO), Reserved Instances, Pricing Calculator, and the economics of cloud adoption
The Three Cost Drivers with AWS
AWS pricing is driven by three fundamentals:
| Driver | How It Works |
|---|---|
| Compute | Charged per hour or second. Varies by instance type. Linux instances can be charged per second. Windows instances typically per hour. |
| Storage | Charged typically per GB. Pricing varies by storage class (S3 Standard vs. Glacier vs. EBS gp3). |
| Outbound Data Transfer | Aggregated across services and charged at a tiered rate. Inbound data transfer is free (with some exceptions). Data transfer between AWS services within the same Region is also typically free. |
AWS Pricing Philosophy: Four Principles
1. Pay for What You Use
No large upfront expenses. No long-term contracts. Pay only for the services you consume. All AWS services are available on demand with no complex licensing dependencies.
2. Pay Less When You Reserve
For EC2 and RDS, invest in Reserved Instances (RIs) and save up to 75% over on-demand:
| RI Type | Upfront Payment | Discount Level |
|---|---|---|
| All Upfront (AURI) | Full upfront | Largest discount |
| Partial Upfront (PURI) | Partial upfront | Medium discount |
| No Upfront (NURI) | None | Smallest discount |
Reserved capacity helps minimize risks, predictably manage budgets, and comply with policies requiring longer-term commitments. Savings Plans offer a more flexible alternative to RIs with similar discounts.
3. Pay Less by Using More (Volume Discounts)
Tiered pricing for S3, EBS, and EFS — the more you use, the less you pay per GB. Multiple storage services deliver lower costs based on your access frequency and performance needs.
4. Pay Even Less as AWS Grows
AWS continuously lowers data center hardware costs, improves operational efficiencies, and reduces power consumption. These economies of scale result in lower pricing passed on to customers. Since 2006, AWS has lowered pricing 75+ times (as of September 2019). Future higher-performing resources replace current ones for no extra charge.
Total Cost of Ownership (TCO)
TCO is a financial estimate that helps identify the direct and indirect costs of a system. Use it to:
- Compare the costs of running an entire infrastructure on-premises vs. on AWS
- Budget and build the business case for moving to the cloud
On-Premises TCO Components
| Category | Cost Items |
|---|---|
| Server Costs | Hardware (server, rack, PDUs, switches, maintenance), software (OS, virtualization licenses, maintenance) |
| Storage Costs | Hardware (disks, SAN/FC switches), storage administration |
| Network Costs | Hardware (LAN switches, load balancers), bandwidth, network administration |
| IT Labor Costs | Server, storage, network, and security administration; application administration |
| Facilities Costs | Data center space, power, cooling, upgrades, maintenance, building security, taxes |
Hard vs. Soft Benefits
| Hard Benefits (Direct) | Soft Benefits (Indirect) |
|---|---|
| Reduced compute/storage/network/security spending | Reuse of services — define/redefine solutions |
| Reductions in hardware/software purchases (CapEx) | Increased developer productivity |
| Reductions in operational costs, backup, DR | Improved customer satisfaction |
| Reduction in operations personnel | Agile business processes + increased global reach |
AWS Pricing Calculator
A free tool to estimate your monthly AWS bill before you build anything:
- Model solutions before building them
- Explore price points and calculations behind estimates
- Find available instance types and contract terms
- Organize estimates by cost center, department, or architecture
- Estimates broken into: first 12 months total, total upfront, total monthly
- Compare different configurations side by side using groups
AWS Free Tier & No-Cost Services
AWS Free Tier
For new customers for up to 1 year: free EC2 t2.micro instance, free tier for S3, EBS, ELB, data transfer, and more. Always Free tier also exists for services beyond year one (e.g., Lambda 1M requests/month).
Services with No Charge
These services are free, but resources they provision may incur costs:
- Amazon VPC
- AWS IAM
- Consolidated Billing (AWS Organizations)
- AWS Elastic Beanstalk
- AWS CloudFormation
- Auto Scaling (the service — EC2 instances are not free)
- AWS OpsWorks
Cloud Economics Quiz
Select one answer per question. You will receive immediate feedback.