The Hidden Math of Managed Services

Most people think about cloud managed services in simple terms: take the raw compute cost, add a 45-75% markup for the managed layer, and that's what you're paying for convenience. This mental model is dangerously wrong once you factor in Reserved Instance pricing.

The basic math everyone knows

Let's start with what's obvious. An EC2 instance costs roughly $1/hour on-demand. A managed service built on top of that instance typically charges a 45-75% premium. So your managed service costs $1.45-$1.75/hour. Fair trade for not managing the infrastructure yourself, right?

The math most people miss

Here's where it gets interesting. EC2 offers Reserved Instance discounts — commit to 1 or 3 years, and your costs drop dramatically. A 3-year Reserved Instance can get you up to 70% off. So that $1/hour instance now costs $0.30/hour.

But here's the catch: most managed services don't offer comparable RI discounts. Some have their own pricing models, but they rarely match the depth of EC2's reserved pricing.

So the real comparison isn't:

Managed service ($1.50) vs. EC2 on-demand ($1.00) = 50% premium

It's:

Managed service ($1.50) vs. EC2 3-year RI ($0.30) = 5x premium

When does this matter?

For a startup spending $1,000/month on EC2, the managed service premium translates to maybe $300 extra. That's absolutely worth it — you're buying back engineering time that's far more valuable.

But for a company like Twitter, where we were spending $200 million per year on infrastructure, the economics flip completely. At that scale:

• The hardware unit economics with a 70% RI discount are already 5-10x the raw hardware price
• Add the managed service premium on top, and you're at 10x+ per unit
• At $200M/year scale, that could mean a billion dollars in premium annually for managed services

That's not a "convenience premium" — that's a fundamentally different cost structure.

The same logic applies to GCP

This isn't an AWS-specific phenomenon. GCP's committed use discounts follow similar patterns, and their managed services (Cloud SQL, Dataflow, etc.) carry comparable markups over raw compute.

The cloud providers have an incentive to push managed services — they're higher-margin products. Understanding the real unit economics is essential for any organization operating at scale.

The takeaway

The decision to use managed services vs. running your own infrastructure isn't about the sticker price comparison. It's about:

1. Your scale: Below ~$50K/month in cloud spend, managed services are almost always worth it
2. Your RI commitment: If you're not using Reserved Instances, you're comparing against the wrong baseline
3. Your team's capacity: The managed service premium buys engineering time — is that time worth more than the premium?
4. The AWS Pricing API: Use it. Pull the actual numbers. Don't rely on assumptions

At internet-scale companies, this analysis can reveal billions of dollars in potential savings. At startups, it confirms that managed services are the right call. The important thing is to actually do the math.