When it comes to the cloud, Amazon has fast become an 800 pound gorilla thanks to Amazon Web Services (AWS).

Sure, it’s had some problems, but thanks to the breadth and depth of its offering, and its pricing, Amazon continues to be the go-to choice for many companies looking to put their applications in the cloud.

On the pricing side of things, AWS customers got some good news yesterday: the company is reducing the cost of a number of AWS services, including EC2, RDS and ElastiCache.

Prices of Reserved EC2 instances have been cut by as much as 37%, while On-Demand instances were cut by up to 20%. Similar reductions were also implemented for Amazon’s RDS, EMR and ElastiCache offerings.

While this is sure to be music to the ears of all AWS customers, the news is best for large customers using EC2: Amazon has also created volume tiers for EC2 Reserved instances. Customers with $250,000 worth of Reserved instances will see an additional 10% shaved off their bill, while those with more than $2m will receive a 20% discount.

All told, Amazon sees the potential for substantial customer cost savings. It gives the following real-world example:

One of our fast growing customers was primarily running Amazon EC2 On-Demand instances, running 360,000 hours last month using a mix of M1.XL, M1.large, M2.2XL and M2.4XL instances.  Without this customer changing a thing, with our new EC2 pricing, their bill will drop by over $25,000 next month, or $300,000 per year – an 8.6% savings in their On-Demand spend. This customer was in the process of switching to 3-year Heavy Utilization Reserved Instances (seeing most of their instances are running steady state) for a whopping savings of 55%. Now, with the new EC2 price drop we’re announcing today, this customer will save another 37% on these Reserved Instances.  Additionally, with the introduction of our new volume tiers, this customer will add another 10% discount on top of all that. In all, this price reduction, the new volume discount tiers, and the move to Reserved Instances will save the customer over $215,000 per month, or $2.6 million per year over what they are paying today, reducing their bill by 76%!

Notwithstanding that some of the cost savings here were due to the customer switching from On-Demand to Reserved instances, the rapid reduction in cost is still very impressive.

Which highlights the big question: how low can Amazon go, and will other large cloud infrastructure players try to compete? With Amazon making its cloud even more tempting, its competitors may find that they can’t afford not to try to follow suit in some fashion.