A customer in the middle of a cloud journey to Azure asked me this question. They have not yet settled on all architectural decisions for their virtual server environment and they are not running full scale yet. A great question to ask – because one thing you do not want is to limit your flexibility and risk wasting money. After all, isn’t flexibility one of the key things cloud is all about?
Fortunately, the answer is in most cases straight forward:
There are four main reasons behind this:
- The savings on many reservations are so large that payback time is very short. Breakeven is often 5-6 months for a 1-year reservation and 9-12 months for a 3-year reservation.
- Most reservations can – at no cost – be changed to other reservations within a similar category of workload.
- Reservations for up to USD 50.000 per running 12 months may be canceled.
- As Azure fills up, the discount you get for reserving falls over time.
Payback Time on Reservations is Short
Most reservations offer 30-70% discount on an annual reservation.
If we take a 60% discount (typical on many virtual machines) this means that after 5 months on Pay-as-you-Go you will have paid more than the price you will pay for 12 months on a one-year reservation.
Reservations can be changed within the same category
Reservations can be changed within the same category.
This means that if you have made a reservation on ie. compute and you later find out that you will change which servers you are running, then you can change the reservation you made on one type of server to another – at no cost, as long as you are reserving for as much money or more than before.
This is true for most reservations but check this before you buy.
What this really means is that if you expect to use the same or more on ie. “Compute”, then it should not be a problem to buy your reservations now even if all architectural decisions are not made.
Frankly, we almost never experience companies reducing their spending. Most companies start using a new platform like Azure and don’t look back. They will put new things on Azure going forward and migrate relevant workload from on-premises. It is highly unlikely that your cloud spend will be smaller in 6 months than it is now. Even if whatever project you are currently working on should end up not becoming a runaway success, something else will most likely take its place.
Reservations for up to USD 50.000 may be Cancelled
Should the unlikely event happen that you end up with too many reservations this is most likely not a problem. You can cancel up to USD 50.000 per running 12 months. Microsoft reserves the right to charge you a 12% cancellation fee, a fee they are not charging at the time of writing. Why? Because they can resell the capacity at higher unit costs.
Discount levels drop over time
Microsoft has a really good pricing team. They effectively price cloud on a value-based pricing principle. Much like hotels they use advanced yield management algorithms to help drive the maximum revenue possible from the available capacity. What we have observed, is that over time, the discount offered for reserving instances drops. You can see this in FS (old) and FSv2 (current) instances, where the 3-year reservation discount for the old instances have dropped to 50.5%, and the same discount for the new is 64%.
Start reserving now!
Therefore, the answer is so straight forward. And we did not even mention the bonus benefit: you can pay your reservations monthly – it is no longer an upfront payment (although you can chose that, if you have committed spend you need to use, or just too much cash laying around)
The situations where you need to be careful is if you are considering stopping your cloud journey within a very short time frame and you are thinking of making reservations exceeding the 50.000 USD threshold. Again, think across the organization – not project or team-specific.
Actually, we would argue that the decision to start buying reservations is not the tricky one. The challenge will be to find out which reservations to buy – and to ensure that you are covering all areas where you can benefit from reservations. And not buying too many.