When Are Partial Upfront Savings Plans Not the Best Option?

It’s widely accepted among FinOps professionals that AWS Compute Savings Plans (cSPs) offer the best balance between discount and free cash flow when purchased using the “Partial Upfront” option (PUF). However, this assumption doesn’t always hold true. Let’s delve into a detailed comparison of the numbers using the Discounted Cash Flows (DCF) approach to evaluate various payment options.

Understanding Discounted Cash Flow (DCF)

Discounted Cash Flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. It takes into account the time value of money, recognizing that a dollar today is worth more than a dollar in the future due to its potential earning capacity. In the context of AWS Savings Plans, DCF helps compare different payment options by considering the present value of all future payments.

Scenario Analysis

Let’s consider a scenario where our usage consists of a single r7i.48xlarge Linux instance in us-east-1, and we plan to use only 3-year Compute Savings Plans to cover it.

According to AWS Savings Plan pricing:

• No Upfront: 48% discount
• Partial Upfront: 52% discount
• All Upfront: 53% discount

While All Upfront offers the highest discount, it requires an immediate payment of $157,990. Partial Upfront requires half of that upfront payment with only a 1% lower discount, making it initially attractive.

Comparing the Numbers

Using the calculator at https://spconsultant.ai we set the following parameters:

• 1-year SP slider to 0 (as we’re not using 1-year SPs)
• WACC (Weighted Average Cost of Capital) at 10%
• Usage data: “r7i.48xlarge 1” (one instance)

The calculator produces these results:

• No Upfront DCF: $150,662
• Partial Upfront DCF: $150,358
• All Upfront DCF: $157,990

It’s important to note that the No Upfront DCF is less than the actual payment over 3 years ($174,111.57). This is because the DCF method discounts future payments more heavily the later they occur.

The Partial Upfront DCF is only slightly less than the No Upfront DCF. This suggests that if your WACC exceeds 10%, No-Upfront SPs might be more advantageous. You can experiment with higher WACC values using the calculator’s slider.

Windows Instances Consideration

An important consideration is that covering Windows instances with partial or all-upfront SPs is often ineffective. This is because a large amount of money is locked in for a marginal discount.

For example, entering “r7i.48xlarge 1 Windows” into the “Usage Data” field yields:

• No Upfront DCF: $351,507
• Partial Upfront DCF: $366,833 (4.4% more)
• All Upfront DCF: $390,095 (11% more)

Conclusion

It’s crucial to break your usage into discount tiers and use appropriate savings plans for each tier. By entering your full usage mix into the calculator’s “usage data” field, it will determine the optimal savings plans mix for you, showing the tiers and the ideal combination to use.

Remember, while Partial Upfront Savings Plans often provide a good balance, they’re not always the best choice. Factors such as your WACC, instance types, and operating systems can significantly impact the most cost-effective option.