Amazon recently announced new pricing option where you reserve an instance for one or three years and then have discount on the hourly rate. The table below describes  the cost per year if the instance is up for the whole year.

The above prices were calculated using Linux instance and United States prices

Cost/Year On Demand instance$ =  cost per hour * 365*24

Cost/Year for 1 year Reserved instance $ = 1 Year reserve price + (cost per hour *  365*24)

Cost/Year for 3 Year reserved instance $ = (3 Year reserve price /3)+ (cost per hour *  365*24)

Now this brings the interesting question when is it cost efficient reserve an instance ?

We can calculate the minimum usage hours over which the cheaper per hour price for a reserved instance starts to decrease the overall cost using the following formula

Instance Reserve Price/(On Demand Instance Hourly Price – Reserve Instance Hourly Price)

e.g for a small one year reserved instance

350/(0.10 – 0.03) = 4642.8 hours

For small 3 year reserved instance

500 / (0.10 – 0.03) = 7142.8 hours

The above calculated numbers are same for all instance types. So you should reserve a one year instance if you intend to use more than 4643 hours  or the instance is up 53% of the time in one year. With a 3 year reserved instance you can save money if over 3 year period you use 7143 or more hours or the instance is up 27% of the time over a  3 year time period.