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Hi Keyanke! I'm assuming you're referring to the rightsizing recommendations (https://docs.aws.amazon.com/cost-management/latest/userguide/ce-rightsizing.html) within cost explorer. Please let me know if you're looking at something else.
Savings are derived based on the settings used on the rightsizing recommendation page (recommendation parameters). The recommender looks over the last 14 days to find EC2 instances that aren't being utilized, with a particular focus on CPU. Some details on this from the documentation-
"Savings calculation
We first examine the instance running in the last 14 days to identify whether it was partially or fully covered by an RI or Savings Plans, or running On-Demand. Another factor is whether the RI is size-flexible. The cost to run the instance is calculated based on the On-Demand hours and the rate of the instance type.
For each recommendation, we calculate the cost to operate a new instance. We assume that a size-flexible RI covers the new instance in the same way as the previous instance if the new instance is within the same instance family. Estimated savings are calculated based on the number of On-Demand running hours and the difference in On-Demand rates. If the RI isn't size-flexible, or if the new instance is in a different instance family, the estimated savings calculation is based on whether the new instance had been running during the last 14 days as On-Demand."
It is good to play around with the recommendations, particularly across instance families and the "other recommendations" to see what might save the most amount of $$ given the utilization over the last 14 days.
Its mainly the utilization metrics of your instance. As a industry standard if the instance CPU/Memory is less than 25% of its configuration then it is good candidate to downsize to save cost. this is just a one example but there may be other factor depends upon the environment , application stack etc.
Thanks all for your response My question here in such case why AWS is not recommending what Instance type fits the bill. Its giving only the Monthly savings but not the right instance type.
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+1 to this answer. Essentially, the system looks at your utilization metrics, estimates if the workload on that instance can be run on a different instance type or family (or smaller instance size within the same samily), it then calculates how much the compute of the new instance type will cost you, and then calculates the difference between the current cost how much you pay for this instance and the new recommended instance type. If you have any RI/SP commitment discounts, then it also takes that into the consideration and includes in the calculation logic.