Azure Savings Plans and Reservations

Azure's pay-as-you-go pricing is flexible but expensive for long-lived workloads. If you know a workload will run for 1 or 3 years, committing to a capacity reservation unlocks significant discounts — up to 72% off pay-as-you-go rates. Microsoft offers two commitment mechanisms: Reserved VM Instances (SKU-specific) and Azure Savings Plans (more flexible). Choosing the right mechanism for each workload is a key FinOps decision.

A Reserved VM Instance (RVI) is a billing commitment to use a specific VM SKU (e.g., Standard_D4s_v5) in a specific Azure region for 1 or 3 years. In exchange, Azure applies a discount of up to 72% compared to pay-as-you-go pricing. The discount applies automatically to any running VM that matches the reserved SKU and region — you do not need to link the reservation to a specific VM. Reservations can be exchanged or cancelled (with an early termination fee of 12% of the unused value).

By default, Reserved VM Instances have instance size flexibility within the same VM series family. For example, a reservation for Standard_D4s_v5 (4 vCPUs) also covers two Standard_D2s_v5 (2 vCPUs each) or half of a Standard_D8s_v5. This flexibility lets you right-size VMs without losing your reservation benefit. Size flexibility does not apply across different series families or regions.

Azure Savings Plans offer a more flexible alternative to Reserved VM Instances. Instead of committing to a specific SKU, you commit to a fixed hourly dollar spend on eligible compute (VMs, App Service, Container Instances, Azure Functions Premium) across any region, SKU, or OS. Savings Plans offer up to 65% off pay-as-you-go rates — slightly less than the maximum RVI discount, but the flexibility to change VM types, regions, and services without exchanging the commitment is a major operational advantage.

Reserved capacity is also available for managed database services. Azure SQL Reserved Capacity applies to Azure SQL Database and SQL Managed Instance vCore purchases, with up to 55% savings. Cosmos DB Reserved Capacity applies to provisioned throughput (RU/s), saving up to 65%. Database reservations follow the same 1- or 3-year term model and apply automatically to matching deployments, regardless of which subscription they are in (when the reservation scope covers a management group or billing account).

Use this decision guide: choose Reserved VM Instances when the VM SKU is stable (you know you will use a specific size for years), and you want the maximum possible discount (up to 72%). Choose Savings Plans when you anticipate SKU changes (modernising to newer VM generations), need coverage across multiple services (VMs and App Service mixed), or operate in multiple regions. For workloads that are truly bursty or short-lived, pay-as-you-go or Spot VMs are more appropriate.

Azure Hybrid Benefit (AHB) allows you to apply your existing on-premises Windows Server or SQL Server licences with active Software Assurance to Azure VMs and managed services, eliminating the licence cost from the Azure hourly rate. Enabling AHB on a Windows Server VM reduces its cost by approximately 40%. Combined with a 3-year Reserved VM Instance, a fully-licensed Windows Server VM can be 80% cheaper than a pay-as-you-go VM with licence included.

When you purchase a reservation, you choose its scope: Single subscription (discount applies only to that subscription), Shared scope (discount applies across all subscriptions in your billing account or management group), or Management group scope (newest option, applies across all subscriptions in the management group). Shared or management-group scope is recommended for large organisations because the reservation engine automatically matches the discount to wherever the eligible VMs are running.

A reservation you are not using is money wasted. Monitor reservation utilisation in the Azure portal > Reservations section, which shows the percentage of each reservation that is being consumed. Azure also sends utilisation alerts when a reservation drops below a configurable threshold (default 60%). If a reservation is consistently under-utilised, investigate whether the reserved SKU is still deployed and consider exchanging it for a different SKU that is more actively used.

Azure allows you to exchange an existing reservation for a different SKU, region, or term at any time without a fee — the new reservation must have equal or greater value. Cancellations are allowed up to $50,000 per 12-month rolling window, but you pay a 12% early termination fee on the remaining value. For large reservation portfolios, establish a quarterly review process to identify reservations that should be exchanged as your workload mix evolves.

Best practice for building a commitment strategy: start by running all workloads pay-as-you-go for 30–60 days to collect utilisation data. Identify workloads with consistent, predictable usage (high reservation candidate). Purchase reservations or savings plans for the stable baseline only — not the peak capacity, which is better served by pay-as-you-go or autoscaling. Typically, a mature Azure estate targets 70–80% of compute under commitment, with the remaining 20–30% on flexible pay-as-you-go for dynamic workloads.

Test your understanding of Microsoft Azure Fundamentals (AZ-900) concepts from this lesson.

In this lesson you learned: Reserved VM Instances offer up to 72% off for SKU-specific commitments, Azure Savings Plans offer up to 65% off with flexibility across services and regions, and Azure Hybrid Benefit eliminates licence costs for Windows Server and SQL Server workloads on Azure. Next up we build a complete FinOps chargeback model using these cost tools.