Azure Reservations Explained: Everything You Must Know

What types of Azure resources are eligible for Azure Reservations?

Although virtual machines were the initial focus, Azure Reservations have expanded beyond VMs. You can now utilise Reserved Instances (RI) with Azure PaaS services, such as SQL Database and App Service.

The table below provides a list of Azure Services that are currently eligible for Reservations:

Benefits of Azure Reservations

Azure Reservations provide several benefits beyond just cost savings. They also improve budget management and guarantee you have the necessary resources.

• Cost savings: You can save up to 72 percent compared to pay-as-you-go prices. The exact savings depend on the service, instance type, and region.
• Improved budget predictability: With reserved instances, you know exactly how much you'll spend on compute resources. This makes budgeting and forecasting much easier.
• Cost predictions: Before buying a Reservation, you can utilise tools such as the Azure Calculator, Azure Advisor, or specific APIs to determine if purchasing Azure Reservations is advantageous for your situation.
• Flexible payment options: You can buy an Azure Reservation by paying the entire amount upfront or in monthly payments. The benefit is that there’s no extra cost for choosing monthly payments compared to paying upfront for a year.
• Exchange anytime: You can change your reservation to a different Azure region, deployment type, performance tier, or term as your needs evolve.
• Subscription flexibility: You can apply reserved capacity pricing to one subscription or spread it across multiple subscriptions.

Drawbacks of Azure Reservations

While Azure Reservations can offer advantages for consistent and predictable workloads, they also have certain limitations.

• Upfront commitment: You must commit to a long-term contract that can be risky if your business needs change.
• Use-it-or-Lose-it: The "use-it-or-lose-it" rule means unused reserved hours cannot be carried forward or accumulated. If you don’t have matching resources for a reserved hour, you forfeit the reservation quantity.
• Not everything is covered: With VMs, compute costs are covered but additional charges for software licences, networking, storage, aren’t.
• Limited refunds: While you can cancel reservations, Microsoft may apply a 12% early termination fee in the future. Besides, you can only cancel up to USD 50,000 worth of reservations per year.
• No capacity guarantee: An Azure reservation secures a discount but doesn’t guarantee resource availability.
• Not available everywhere: For PAYG subscriptions, these instances aren’t available in Argentina, Brazil, Cuba, Hong Kong, India, Iran, Indonesia, North Korea, Liechtenstein, Malaysia, Mexico, Russia, Saudi Arabia, South Africa, Sudan, Syria, Turkey, Ukraine, Belarus, Kazakhstan, and Azerbaijan.
• Not all series and versions are supported: Unavailable for A-series or G-series VMs, and don’t apply to promotional VMs.

How are Reserved Instance discounts applied in Azure?

Microsoft applies reserved instance discounts based on resource usage, combined with the selected options when you purchase the reservation.

Here’s how it works: You need to buy a reservation for a specific region and a virtual machine (VM) size. The reservation applies to that matching VM and your usage, and Microsoft stops charging you on-demand for a matching VM (it’s not like a discount card).

In exchange for committing to paying for 1 or 3 years of qualifying services, Microsoft applies a discount to those services. This involves a “use-it-or-lose-it” model; if there’s no service to apply the discount to at a particular month, the discount will be lost (unused reserved hours do not roll over to the next period).

The diagram below illustrates this clearly: usage below the orange line is pre-paid through the reservation, while any usage above the reserved level is charged at pay-as-you-go rates. 

Read more about it here. So, back to this example.

For this example in hour 1:

• Instance 1 runs for 0.75 hours
• Instance 2 runs for 0.5 hours

This makes up for 1.25 hours, which will be charged PAYG rates for the extra 0.25 hours.

When you shut down your resources, Azure will attempt to automatically apply your reservation discount to another matching resource within your agreed-upon scope. If there are no matching resources, the reservation will remain unused.

The good news is that you can update your reservation scope at any time so you can get the most out of your reservation as needs change.

A key point to understand about Azure reservations is that they do not guarantee resource availability. While reserving resources secures a reduced rate, it doesn't mean they will always be available when needed.

In most cases, Azure’s vast capacity ensures no issues with availability, but if capacity constraints arise, an Azure reservation only provides preferential treatment, not a hard guarantee.

If you require guaranteed capacity, you should consider Azure capacity reservations, which lock in specific resources and ensure availability. 

The good news is that capacity reservations can work alongside Azure reservations, so you can apply the reduced rate to guaranteed capacity.

How Reservation Scopes Work in Azure

Discounts from Azure Reserved Instances are applied to a scope, meaning they only benefit resources within that scope. The scope can be set at three different levels:

1. Resource group: This is the most restrictive, where the reserved instance only applies to qualifying services within that resource group. This would make sense for organisations that may charge back by resource groups.
2. Subscription: RI's can be applied to qualifying services in a subscription, which is less restrictive than the resource group.
3. Shared scope: Shared scopes will apply to qualifying services for subscriptions in a billing context. A billing context could be all eligible subscriptions created by a single administrator for PAYG subscriptions or all subscriptions with enrolment for EA customers. 

What's great is that the scope can be modified if it stays within the same billing context.

For example: you can move a reservation between subscriptions within an Enterprise Agreement (EA) enrollment.

How much can you save with Reserved Instances in Azure?

If you’ve ever searched for the term “Azure Reserved Instances” or “Azure Reservations” on Google, you’ve likely come across the claim that you can save up to 80% by using these services. While this claim is theoretically accurate, it’s often not the case in practice.

Our customers have achieved savings of over 50% when using Reserved Instances and Hybrid Benefit.

The image below visually represents the potential savings for different Azure services.

You'll simply pay the standard pay-as-you-go rates for any additional resources you need beyond your reserved amount.

How are Azure Reservations billed?

Azure Reservations can be paid monthly or upfront. The cost is billed to your default payment method in the subscription where the reservation is purchased. If you have a pay-as-you-go subscription with a credit card, the card is charged immediately for upfront payments or billed monthly alongside your regular usage costs if you opt for monthly payments.

However, if you have a CSP subscription, you’ll need to purchase the reservation through your partner. Your partner will then bill you directly according to their terms.

Which Resources should you use for Azure Reservations?

Reserved instances go against the benefits of the cloud: the ability to shut instances down whenever you don't need them, turn them on when you do, and scale them up and down whenever necessary while only paying for the usage.

On the contrary, Azure reserved instances are for workloads that don’t need those benefits. These are often very stable workloads that will constantly consume. Long-term workloads expected to run continuously for an extended period, such as a year or more, or workloads with long-term commitments. The costs of these workloads can be reduced through Reservations in Azure.

Analyse Usage before committing to a VM Reserved Instance

Azure reservations (except Databricks) work on an hourly basis. If you buy more capacity than you need, you risk wasting money, as unused reservations don’t roll over.

If your usage goes over the reserved capacity, you’ll pay standard PAYG rates for the extra usage. To avoid surprises, always buy your reservations based on an analysis of consistent baseline usage.

You’d want to be 100% sure which VM size to choose, because it’s not possible to change it once purchased.

Fortunately, there’s a quite simple way to check your historical VM usage so you can determine on the best Azure Reservation.

Follow along with these steps:

1. Head to the Azure Portal.
2. Search for subscriptions and click on it.
3. Select Billing > Invoices
4. Use your most recent invoice or the one that best reflects your avg. VM usage.
5. Click Download CSV (under Usage Details).

Use this data over multiple periods to calculate your average VM usage, keeping in mind any positive or negative growth your company might be experiencing.

How to buy Azure Reserved Instances?

You can buy Azure Reserved VM instances directly in the Azure portal through either monthly billing or single, upfront payment.

1. Login to the Azure portal and navigate to Reservations. Easier is to click on the following link to go to the purchase Reservations page.
2. Click on add in the top left corner in the menu bar:
3. Then, the purchase reservations pane should appear. It should look like this:
   
4. Select the product you want to purchase. The Select the product you want to purchase pane will open, showing Azure’s recommendations for products and quantities to help you maximise savings.
5. Click Add to cart, then Close.
6. Next, select Review + buy.
   
   

You can also purchase reservations programmatically using:

• REST API
• Azure PowerShell
• Azure CLI

Termination Fees

Even though reservations are at least for one year at a time, you are not locked in for that entire period. You can cancel your reservation and still get a refund. However, Microsoft charges early termination fees for reservations with 12%. 

When that happens, you don’t pay a penalty fee but it's limited up to $50000 for a rolling 12-month period and there are some limitations as to which services you can get a refund from (Azure Databricks and VMware solutions aren’t eligible). You can exchange your reservations for new ones, with the new term starting from the exchange date.

For example: you exchange a 3-year reservation that you’ve held for 1 year for a new 3-year reservation. Then, the new reservation will last for a full 3 years, not the remaining 2 years of the original term.

Besides, the new reservation will have its own term regardless of how old the reservations you are turning in are. So, if that’s 3 years, exchanging it means the 3-term starts again from scratch.

How to exchange Azure Reservations?

It might happen that you purchased reservations for a certain virtual machine, and then a new generation rolls out, like going from a v2 to a v4. The good news is that Microsoft allows you to change reservations. 

You can change your reservation from one VM instance flexibility group to another or move it from one region to another. But what you cannot do is exchange a VM for a Cosmos DB or switch from SQL to Cosmos DB. Exchanges are only allowed within the same resource type, not between different services.

Follow along with these steps to exchange Reservations:

1. Log in to the Azure Portal.
2. Go to All Services > Reservations to see the list of reservations you have access to.
3. Select the reservation you want to exchange and click Exchange.
4. Choose the VM product, enter the quantity, and click Next: Review.
5. Review the exchange and complete the transaction.

Combine Azure Reservations with Azure Hybrid Benefit

A clever way to save even more on your Azure costs is to combine Azure Reservations with Azure Hybrid Benefit. This can lower costs if you commit to a 3-year reservation. 

To make this work, you’ll need to:

• Be a Microsoft Enterprise Agreement customer.
• Have active Software Assurance in place.

Closing thoughts

Overall, Reservations in Azure are an excellent option for qualifying services you are committed to using for the foreseeable future. They offer significant savings, improve budget predictability, and ensure you have the compute capacity you need.

But remember: you must know your base run rate of resources and you should know strategically where you’re going for the next year (or 3-years). Once you know the base usage level, you can leverage the discount from Azure reservations. 

Also, look at your usage: see what VM and region you’re using consistently over some time and try to buy reservations for them if they are predictable and always running.

In general, Azure Reserved Instances are for workloads you want to run 24/7, not interruptible workloads. But even if your VMs aren’t running 24/7, switching to reserved instances might still make financial sense.
An analysis comparing PAYG costs to reserved instance pricing can show potential savings.

So, look at the different VMs you’ve got in use: perhaps some huge saving opportunities are waiting for you to take advantage of.

And do not forget: Azure reservations are great for budgeting and saving costs, but they don’t provide you with any guaranteed availability.