With my approach the AutoScaling group would always replace failed instances with the on-demand ones identical to those initially defined on the group's launch

With my approach the AutoScaling group would always replace failed instances with the on-demand ones identical to those initially defined on the group's launch configuration. All I do is I later attempt to replace them with whatever I can buy from the spot market. On the other hand, the spot bidding implemented out of the box in AutoScaling will fail if you are outbid in all Availability Zones at the same time, since it doesn't fall back to on-demand instances. I've seen people often use a second on-demand AutoScaling group that would scale out when you get outbid on the spot one, but then you have a problem defining scaling policies so that they can scale nicely, and/or shifting the capacity between them. Someone had a nice talk at re:invent about how they do all that.