RESERVED INSTANCES

Reserved Instances & Savings Plans

Commit to long-term usage for massive cloud cost savings

What are Reserved Instances?

Reserved Instances (RIs) and Savings Plans are commitment-based discounts offered by cloud providers. You commit to using specific resources (or a dollar amount of compute) for 1 or 3 years, and in return, you receive 40-65% discounts compared to pay-as-you-go pricing.

Think of it like buying in bulk or getting a membership discount: you promise to be a loyal customer, and the provider rewards you with lower rates.

Pay-As-You-Go (PAYG)

Maximum flexibility: Pay only for what you use, scale up or down instantly, no commitments.

Full Price

Perfect for dev/test, unpredictable workloads, short-term projects

Reserved Instances

Commitment-based: Reserve specific VM sizes/types for 1 or 3 years upfront.

40-65% Discount

Ideal for stable production workloads with predictable capacity needs

Savings Plans

Flexible commitment: Commit to $/hour of compute spend, works across VM families and regions.

40-65% Discount

Best of both: savings + flexibility for changing architectures

How Azure Reservations Work

The Commitment Model

What You Commit To:

  • Specific VM size (e.g., Standard_D4s_v3)
  • Quantity (e.g., 10 VMs)
  • Region (e.g., East US)
  • Term (1 year or 3 years)

What You Get:

  • 40-72% discount on compute costs
  • Automatic billing discount
  • No operational changes
  • Option to exchange/cancel (with limits)

Key Point: Reservations are a billing discount, not separate resources. Your VMs run exactly the same—you just pay less for them.

1-Year vs. 3-Year Reservations

Comparison Factor 1-Year 3-Year
Discount ~40-50% ~60-72%
Commitment 12 months 36 months
Flexibility ✓ Higher - exit/change sooner ⚠ Lower - longer lock-in
Risk Lower risk if needs change Higher risk for unused capacity
Best For New production workloads, testing commitment Established apps with stable usage
Total Savings (example) $100K → $55K = $45K saved $300K → $100K = $200K saved

Illustrative Example: Reservation Purchase

This is a hypothetical, illustrative example for teaching purposes, not an actual case study.

Scenario: SaaS Company Production Database VMs

You have 20 Standard_D8s_v3 VMs running SQL databases 24/7 in East US. These are core production workloads that will definitely run for the next 3 years.

Current Pay-As-You-Go Costs:

20 × Standard_D8s_v3 VMs $0.384/hour each
Hourly cost: 20 VMs × $0.384 $7.68/hour
Monthly cost: $7.68 × 730 hours $5,606/month
Annual Pay-As-You-Go Cost: $67,274/year

Option A: 1-Year Reservation

Discount: 49% off
Cost: $34,310/year
Savings: $32,964/year

Lower risk: If you migrate off SQL VMs to managed PaaS within a year, you're only committed for 12 months

Option B: 3-Year Reservation

Discount: 72% off
Cost: $18,837/year
Savings: $48,437/year

Maximum savings: Over 3 years, save $145K. If these are truly stable workloads, this is "free money"

3-Year Total Comparison:

Pay-As-You-Go (3 years): $201,822
1-Year RI × 3 renewals: ~$102,930
3-Year RI (single commitment): $56,511
Total 3-Year Savings: $145,311

Decision Rule: If you're confident these VMs will run continuously for 3 years, the 3-year RI is a no-brainer. If there's any chance of architecture changes (e.g., migrating to Azure SQL Managed Instance), start with 1-year RI to test the waters.

Reserved Instances vs. Savings Plans

Feature Reserved Instances Savings Plans
Commitment Type Specific VM size + region $/hour of compute spend
Flexibility ⚠ Lower - tied to specific SKU ✓ Higher - works across VM families
Discount Up to 72% Up to 65%
Region Flexibility ✗ Locked to specific region ✓ Works across regions
Instance Size Flexibility ⚠ Limited (within instance family) ✓ Full flexibility
Best For Predictable, unchanging workloads Dynamic architectures, multi-region apps
Example Use Case 20 SQL VMs in East US, same SKU for years Apps that might migrate D-series → E-series or change regions

When to Use Reservations

Perfect Fit

  • Production databases running 24/7
  • Core application VMs with stable load
  • Always-on services (monitoring, VPN gateways)
  • Known capacity with minimal variation
  • Long-term projects (3+ years)

Use With Caution

  • New applications still finding product-market fit
  • Highly variable workloads (batch processing)
  • Architectures in flux (migrating to containers)
  • Uncertain capacity needs
  • Multi-cloud strategies (might move to AWS/GCP)

Don't Use

  • Dev/test environments (shut down at night/weekends)
  • Temporary projects (< 1 year)
  • Experimental workloads
  • Resources with < 80% utilization
  • Workloads that autoscale down

Reservation Management Best Practices

1

Track Utilization Religiously

Azure provides reservation utilization reports in Cost Management. Monitor these monthly:

  • 90-100% utilization: You're maximizing value—consider buying more
  • 70-89% utilization: Good, but room for optimization
  • < 70% utilization: You're paying for unused reservations—investigate why

Pro Tip: Set up Azure Monitor alerts when utilization drops below 80% for 7 days. This indicates VM shutdowns, decommissions, or rightsizing opportunities.

Third-Party Tools:

  • Turbo360: RI utilization tracking and alerts across subscriptions

(Disclosure: Turbo360 is one of this site's supporting partners—see the homepage. Treat these figures as illustrative, not independently verified.)

2

Start Small, Expand Gradually

Don't commit 100% of capacity immediately:

  1. Month 1: Buy reservations for 50-70% of stable baseline capacity
  2. Month 2-3: Monitor utilization and adjust
  3. Month 4+: Expand to 80-90% coverage once patterns are validated

Why? Leaves headroom for unexpected changes and avoids over-committing to resources you might not need.

3

Use Instance Size Flexibility

Azure allows reservations to apply across different VM sizes within the same family:

  • Reserve 10 × D4s_v3 VMs
  • Reservation automatically covers 5 × D8s_v3 or 20 × D2s_v3
  • Gives flexibility to rightsize without wasting reservations
4

Plan Renewal Strategy

Set calendar reminders 60 days before reservation expiration:

  • Still needed? Renew at same or adjusted capacity
  • Architecture changed? Switch to Savings Plan for flexibility
  • Workload migrated? Don't renew, switch to PAYG or new SKU

Common Mistakes to Avoid

Over-Committing

"Let's reserve 100% of our VMs!" Then you rightsize and have wasted reservations.

Solution: Reserve 70-80% of predictable baseline

Ignoring Spot VMs

For fault-tolerant workloads (batch, testing), Spot VMs are 60-90% off—better than RIs.

Solution: Hybrid approach: RIs for stable, Spot for flexible

Wrong Region

Reserved for East US, but VMs run in West US. Reservation sits unused.

Solution: Match reservation region to actual workload region

Forgetting PaaS

Reservations work for Azure SQL Database, Cosmos DB, App Services too—not just VMs!

Solution: Review ALL Azure services for reservation opportunities

Not Tracking ROI

You buy reservations but never calculate actual savings realized.

Solution: Monthly reports comparing actual vs. PAYG costs

Waiting Too Long

"We'll buy RIs after optimizing first." You lose months of potential savings.

Solution: Reserve known stable workloads NOW, optimize later

For Cloud Engineers

Reservations are the easiest 40-65% win in cloud cost optimization:

  • No code changes: It's purely a billing commitment
  • No operational impact: VMs run exactly the same
  • Huge ROI: $100K → $35K with a few clicks
  • Low-hanging fruit: CFOs love this because it's immediate, guaranteed savings
  • Career boost: "I saved $500K/year by implementing a reservation strategy" looks great on resumes

Action Item: Run an Azure Advisor report TODAY. It will recommend specific reservations based on your usage. Present the savings to your manager, get approval, and your Azure bill usually reflects the 40-65% savings on stable workloads within a billing cycle.

Reserved Instances Savings Calculator

Compare pay-as-you-go vs reserved pricing and see your savings potential

Current VM Configuration

Your Current VM Usage

Current monthly VM bill (e.g., 50 VMs × $200)
% of time VMs are running (24/7 = 100%)
Annual Pay-As-You-Go Cost
$120,000

1-Year Reservation

Typical: 35-50%
PAYG Cost
$10,000
With 1-Year RI
$6,000
Monthly Savings
$4,000

3-Year Reservation

Typical: 60-72%
PAYG Cost
$10,000
With 3-Year RI
$3,500
Monthly Savings
$6,500

Business Context (Optional)

For cost-to-revenue ratio
Operating profit margin

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