This chapter covers Azure Reserved Instances (RIs) and Azure Savings Plans—two key discount models that can reduce your compute costs by up to 72% compared to pay-as-you-go. For the AZ-104 exam, these topics appear in about 10-15% of questions, often as part of cost optimization scenarios. You will learn how each model works, when to use them, and how to manage them effectively. Mastery of this topic is essential for the 'Manage Azure identities and governance' and 'Implement and manage storage' domains, as cost management is a core administrator responsibility.
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Imagine you run a coffee shop that uses 500 disposable cups every day. You have two purchasing options: pay $0.10 per cup each time you order (pay-as-you-go) or commit to buying 10,000 cups upfront for $0.05 each (reserved pricing). With the upfront commitment, you get a 50% discount per cup, but if your shop closes or demand drops, you're stuck with unused cups. Now imagine your supplier offers a flexible plan: you agree to spend at least $100 per month on cups, but you can mix cup sizes and types as needed (Savings Plan). This gives you a 40% discount without locking you into a specific cup type. In Azure, Reserved Instances (RIs) require a 1- or 3-year commitment to a specific VM size and region, while Savings Plans let you commit to an hourly spend ($/hour) that applies to any VM, region, or even other compute services like App Service. Both reduce costs, but RIs offer deeper discounts for rigid workloads, while Savings Plans provide flexibility for dynamic environments. If you over-commit, you waste money; if you under-commit, you pay full price for overflow—just like ordering too many or too few cups.
What Are Reserved Instances and Savings Plans?
Azure Reserved Instances (RIs) and Azure Savings Plans are discount mechanisms applied to your pay-as-you-go (PAYG) rates when you commit to a certain level of usage over a 1- or 3-year term. They are not separate instances or services—they are billing discounts that automatically apply to eligible resources. RIs are specific to a particular VM size, region, and tier (e.g., Standard_D2s_v3 in East US), while Savings Plans are flexible and apply to any compute resource (VMs, App Service, Azure Functions, etc.) within a chosen scope (e.g., a subscription or management group).
How RIs Work Internally
When you purchase an RI, Azure creates a reservation resource in your Azure subscription. This reservation does not provision any VMs; it simply acts as a billing artifact. When a VM runs, the Azure billing engine checks if there is an active reservation that matches the VM's attributes (size, region, tier, and instance size flexibility). If a match is found, the VM's compute cost is discounted by the RI's terms. The discount is applied hourly. For example, if you buy a 1-year RI for a Standard_D2s_v3 in East US, any VM that matches that exact configuration (or a smaller VM in the same series due to instance size flexibility) will get the discounted rate. The RI covers the compute cost only—storage, networking, and licensing are billed separately.
Key Components of RIs
- Term: 1 year or 3 years. 3-year terms offer higher discounts (up to 72% vs. 40% for 1-year).
- Payment Option: Upfront (full payment), partial upfront (half), or monthly (no upfront). Upfront gives the highest discount.
- Scope: Single subscription or shared across subscriptions under the same billing account (Enterprise Agreement, Microsoft Customer Agreement, or Pay-As-You-Go).
- Instance Size Flexibility: Automatically applies to VMs in the same VM series (e.g., Standard_D2s_v3 can cover Standard_D1s_v3, Standard_D4s_v3, etc., with adjusted multipliers).
- Reservation Properties:
- ReservedResourceType: VirtualMachines for RIs.
- Sku: e.g., Standard_D2s_v3.
- Location: e.g., eastus.
- Term: P1Y or P3Y.
- BillingScopeId: The subscription or billing account.
How Savings Plans Work Internally
Savings Plans are similar but more flexible. You commit to an hourly spend (e.g., $1.00/hour) for a 1- or 3-year term. Azure then applies a discount to any compute usage up to that hourly commitment. For example, if you commit $1.00/hour and your actual usage is $1.50/hour, the first $1.00 is discounted, and the remaining $0.50 is billed at PAYG rates. The discount rate depends on the term and payment option, but it is generally lower than RIs (up to 65% for 3-year). Savings Plans apply to:
Virtual Machines (including A-series, B-series, D-series, etc.)
App Service (Premium v3 plans)
Azure Functions (Premium plan)
Azure Container Instances
Azure Dedicated Host
Configuration and Verification
You can purchase RIs and Savings Plans via the Azure portal, Azure CLI, PowerShell, or APIs.
Azure CLI example to purchase an RI:
az reservations purchase \
--reservation-order-id "new-reservation-order-id" \
--reserved-resource-type VirtualMachines \
--sku Standard_D2s_v3 \
--location eastus \
--quantity 1 \
--term P1Y \
--billing-scope-id "/subscriptions/12345678-1234-1234-1234-123456789012" \
--display-name "MyRI"Azure CLI to list reservations:
az reservations list --subscription <subscription-id>Azure CLI to purchase a Savings Plan:
az savingsplan purchase \
--billing-account-name <billing-account-id> \
--billing-profile-name <billing-profile-id> \
--savings-plan-name "MySavingsPlan" \
--display-name "MySavingsPlan" \
--billing-scope-id /subscriptions/<subscription-id> \
--term P1Y \
--commitment-amount 1.0 \
--commitment-currency USDVerification in Azure Portal: - Navigate to Reservations (for RIs) or Savings Plans (for Savings Plans) to view active reservations. - Use Cost Management + Billing > Advisor recommendations to see recommendations for purchasing.
Interaction with Related Technologies
Azure Hybrid Benefit: Can be stacked with RIs and Savings Plans for additional savings if you have Software Assurance on Windows Server or SQL Server licenses.
Azure Dedicated Host: RIs can be purchased for Dedicated Hosts, but Savings Plans do not cover Dedicated Hosts (they cover the underlying compute, but the host itself is a separate resource).
Azure Spot VMs: RIs and Savings Plans do not apply to Spot VMs because Spot VMs already have a different pricing model.
Reservation utilization tracking: Azure provides utilization reports to help you understand if you are under-using your reservations. Under-utilization means you are paying for unused capacity.
Default Values and Timers
Reservation renewal: By default, reservations do not auto-renew. You can enable auto-renewal at purchase or later.
Refund policy: You can exchange a reservation for another of the same type, or cancel (with a prorated penalty) up to $50,000 per year in total refunds for a billing profile.
Savings Plan expiration: No auto-renewal; you must manually renew or purchase a new one.
Billing alignment: Discounts are applied hourly. If you stop a VM mid-hour, the discount is still applied for that hour if the VM ran at any point.
Exam-Relevant Details
RIs are specific to a VM size family and region; Savings Plans are flexible across regions and services.
Both require a 1- or 3-year commitment.
Upfront payment yields the highest discount, then partial upfront, then monthly.
Instance size flexibility is automatic for RIs (within the same VM series).
Savings Plans automatically apply to any compute usage in the scope, up to the hourly commitment.
You can share reservations across subscriptions under the same billing account.
Azure Advisor provides purchase recommendations based on your usage patterns.
You can track reservation utilization in the Azure portal.
Exchanges and cancellations are allowed but have limitations (e.g., $50,000 annual cancellation limit).
Assess Usage Patterns
Before purchasing, analyze your existing compute usage for at least 30 days. Use Azure Advisor or Cost Management to identify consistent baseline usage. For RIs, you need VMs that run 24/7 with a specific size and region. For Savings Plans, you need a consistent hourly spend across any compute resources. Look for workloads that are predictable and stable, such as production databases or web servers. Avoid committing to highly variable or short-lived workloads.
Choose RI or Savings Plan
Decide based on workload flexibility. If you have fixed-size VMs in a single region that run continuously, RIs offer the highest discount (up to 72%). If your compute usage varies across VM sizes, regions, or services (e.g., App Service), choose a Savings Plan for flexibility (up to 65%). For the exam, remember that RIs are more restrictive but cheaper; Savings Plans are more flexible but slightly less discounted.
Select Term and Payment
Choose 1-year or 3-year term. 3-year gives a higher discount but a longer commitment. Payment options: upfront (full payment), partial upfront (half), or monthly (no upfront). Upfront gives the best discount, but consider cash flow. For the exam, know that upfront payment yields the highest savings, and monthly payment is available for Enterprise Agreement and Microsoft Customer Agreement customers.
Purchase via Portal/CLI
In the Azure portal, navigate to Reservations or Savings Plans, click Add, and fill in the details. For RIs, specify the VM size, region, scope, term, and quantity. For Savings Plans, specify the hourly commitment amount, scope, term, and billing frequency. Use Azure CLI or PowerShell for automation. After purchase, the discount applies automatically to matching resources.
Monitor and Optimize
Use Azure Advisor to track utilization. If utilization drops below 80%, consider exchanging or canceling the reservation (with penalties). For RIs, you can exchange for a different VM size in the same family. For Savings Plans, you cannot exchange, but you can cancel within limits. Set up alerts for low utilization to avoid waste. Regularly review recommendations for new purchases.
Enterprise Scenario 1: Stable Production VMs
A financial services company runs 50 Standard_D4s_v3 VMs in East US for their trading platform, 24/7. They purchase a 3-year RI with upfront payment for all 50 VMs, saving 72% vs PAYG. The VMs are identical and never change. The RI is scoped to a single subscription. The company saves $200,000 annually. Misconfiguration: If they later migrate to a different VM series (e.g., Dsv5), the RI becomes useless unless exchanged. They must plan for upgrades carefully.
Enterprise Scenario 2: Flexible Dev/Test Environment
A SaaS startup runs a mix of VMs, App Service plans, and Azure Functions across multiple regions. Their hourly compute spend averages $50/hour but spikes to $80/hour during deployments. They purchase a 3-year Savings Plan for $50/hour, covering the baseline. Spikes are billed at PAYG. This saves 65% on the baseline. Common mistake: They initially bought an RI for a specific VM size, but when they switched to containers, the RI was wasted. Savings Plans avoided this.
Enterprise Scenario 3: Multi-Subscription Environment
A large enterprise with 10 subscriptions under one EA enrollment wants to centralize reservations. They purchase RIs with scope set to 'Shared' so all subscriptions benefit. This maximizes utilization. However, they must monitor usage across subscriptions to avoid one subscription consuming all the discount. They use Cost Management to allocate charges back to departments. If they purchase with 'Single' scope by mistake, other subscriptions miss out, leading to higher costs.
What AZ-104 Tests
AZ-104 objective 'Manage Azure identities and governance' includes cost management, and 'Implement and manage storage' touches on reserved capacity for storage (but not compute). However, the main compute discount topics are covered under 'Manage Azure resources' and 'Optimize costs'. Expect questions on:
Differences between RIs and Savings Plans
Term lengths and payment options
Scope (single vs shared)
Instance size flexibility
How discounts apply (hourly)
Exchange and cancellation policies
Azure Advisor recommendations
Common Wrong Answers
'RIs provide a discount on all Azure services' – Wrong. RIs only discount compute (VMs). Savings Plans also cover App Service, Functions, etc., but not all services.
'You can cancel an RI at any time with no penalty' – Wrong. Cancellations are allowed but have a prorated penalty and a $50,000 annual limit.
'Savings Plans require a specific VM size' – Wrong. Savings Plans are flexible; they apply to any compute resource up to the hourly commitment.
'RIs cannot be shared across subscriptions' – Wrong. They can be shared if scoped to 'Shared'.
Exam Numbers and Terms
Discounts: Up to 72% for 3-year RI, up to 65% for 3-year Savings Plan.
Terms: P1Y, P3Y.
Payment: Upfront, partial upfront, monthly.
Scope: Single subscription, shared (under same billing account).
Instance size flexibility: Automatically applies to same VM series; e.g., Standard_D2s_v3 covers Standard_D1s_v3 (0.5x), Standard_D4s_v3 (2x).
Utilization: Tracked in portal; below 80% is considered low.
Exchange: Allowed for RIs (same type, different attributes); Savings Plans cannot be exchanged.
Cancellation: Up to $50,000 per year per billing profile.
Edge Cases
RIs do not apply to Spot VMs.
Savings Plans do not apply to Azure Dedicated Hosts.
If you have a Savings Plan and an RI for the same VM, the RI discount is applied first (higher discount).
For VMs with Azure Hybrid Benefit, the RI discount is applied to the compute cost, and the license cost is waived separately.
Eliminating Wrong Answers
When you see a question about discount models, first identify whether the workload is fixed or variable. Fixed -> RI, variable -> Savings Plan. Then check term and payment options. If the question mentions 'flexibility', lean towards Savings Plan. If it mentions 'highest discount', lean towards 3-year RI with upfront. If it mentions 'across multiple subscriptions', look for 'shared scope'.
RIs require a 1- or 3-year commitment to a specific VM size and region; Savings Plans commit to an hourly spend ($/hour) for any compute.
Upfront payment yields the highest discount; monthly payment yields the lowest discount.
RIs can be scoped to a single subscription or shared across subscriptions under the same billing account.
Instance size flexibility automatically applies to VMs in the same series (e.g., D2s_v3 covers D1s_v3, D4s_v3).
Savings Plans are more flexible but offer slightly lower discounts than RIs.
Azure Advisor provides purchase recommendations based on your usage history.
You can exchange RIs for different attributes (e.g., size, region) but not for Savings Plans.
Cancellation of reservations is allowed but with a prorated penalty and a $50,000 annual limit.
Both RIs and Savings Plans can be combined with Azure Hybrid Benefit for additional savings.
Utilization below 80% is considered low; monitor via Cost Management.
These come up on the exam all the time. Here's how to tell them apart.
Reserved Instances (RIs)
Discount up to 72% (3-year, upfront).
Requires commitment to a specific VM size and region.
Instance size flexibility within same series only.
Applies only to Virtual Machines (compute).
Can be exchanged for another RI of same type.
Savings Plans
Discount up to 65% (3-year, upfront).
Flexible: applies to any compute resource across regions and services.
No instance size restriction; applies to any eligible resource.
Covers VMs, App Service, Functions, Containers, Dedicated Host.
Cannot be exchanged; only cancellable with penalty.
Mistake
Reserved Instances provision a dedicated VM for you.
Correct
RIs are purely a billing discount. They do not create or reserve any compute capacity. You must still deploy VMs separately.
Mistake
You can only buy RIs for VMs that are currently running.
Correct
You can buy RIs at any time, even if no VMs are running. The discount will apply to future VMs that match the reservation attributes.
Mistake
Savings Plans cover all Azure services.
Correct
Savings Plans cover only compute services: VMs, App Service, Azure Functions (Premium), Azure Container Instances, and Azure Dedicated Host. They do not cover storage, networking, or databases.
Mistake
You can cancel an RI at any time with a full refund.
Correct
Cancellation is allowed but with a prorated penalty. You also have an annual cancellation limit of $50,000 per billing profile.
Mistake
Instance size flexibility means any VM in any series can use the RI.
Correct
Instance size flexibility applies only within the same VM series (e.g., D-series). A D-series RI cannot cover an E-series VM.
Reveal each answer, then mark whether you got it right. Score 60%+ to unlock the next chapter.
Yes, but it may not be cost-effective. RIs provide the best value for VMs that run continuously. If your VM runs only 8 hours a day, you are paying for 24 hours of discounted compute, but the unused hours are wasted. Consider using a Savings Plan or pay-as-you-go for intermittent workloads.
The RI discount continues to apply to any matching VM that runs. If no matching VM runs, the RI is wasted. You can exchange the RI for a different size or region (if available) or cancel it with a penalty. Monitor utilization to avoid waste.
Yes. The RI discount is applied automatically to any running VM that matches the reservation attributes. No action needed on the VM. The discount starts from the moment the reservation is purchased.
When purchasing an RI, set the scope to 'Shared'. This allows the discount to apply to any eligible VM in any subscription under the same billing account (EA, MCA, or PAYG). You cannot share across different billing accounts.
Partial upfront requires a 50% payment at purchase, and the remaining 50% is billed monthly over the term. Monthly payment spreads the cost equally across months with no upfront payment. Upfront payment gives the highest discount, followed by partial upfront, then monthly.
No. Savings Plans are defined by an hourly commitment amount ($/hour), not a specific VM size. The discount applies to any eligible compute resource up to that commitment. You cannot restrict it to a single size.
No. They only cover compute costs. Storage, networking, and licensing (unless you use Azure Hybrid Benefit) are billed separately at pay-as-you-go rates.
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