As cloud adoption grows, so do cloud costs – often beyond what businesses expect. It’s no surprise that “reducing cloud waste” has emerged as the top priority for FinOps teams in 2024.
Cloud waste is anything you’re paying for but not fully utilizing in the cloud — and there’s a lot of it. Executives estimate that approximately 30% of cloud compute spending is wasted – which is huge when written in numbers!
That’s why it’s crucial to opt for Microsoft Azure cost optimization and seek pricing alternatives or other saving opportunities that can help you maximize your cloud ROI.
While one approach is to reduce consumption through usage optimization, another is to reduce the price you’re paying per unit through rate optimization: the practice of reducing the per-unit cost of running workloads by leveraging discounts, pricing models, and agreements.
One such Azure discount instrument is the Azure Savings Plan. Read on as we explore how Azure Savings Plans work, the benefits, and key considerations to keep in mind before committing.
What Is the Azure Savings Plan for Compute?
The Azure Savings Plan is a flexible pricing model that offers discounted rates of up to 65% on eligible compute services in exchange for making an hourly spend commitment over one or three years.
Once you’ve used up the committed amount for the hour, any additional usage is charged at your regular pay-as-you-go rate. However, any unused portion of the commitment does not roll over and is forfeited, meaning you lose that benefit if it’s not fully utilized within the hour.
Unlike Azure Reserved Instances, Savings Plans are ideal for dynamic workloads as you’re not tied to specific virtual machine sizes or regions, and Savings Plans apply to a wide range of compute services, including:
- Virtual Machines
- Azure App Service
- Azure Functions
- Azure Container Instances
You can access the full list of Azure Savings Plan-eligible services here.
Before opting for an Azure Savings Plan, the first step is to determine your hourly commitment amount. Microsoft Azure provides personalized recommendations based on your recent usage to help you set your plan’s hourly spend. Once you commit, Microsoft automatically applies your savings to eligible usage. But remember, the Azure Savings Plan for compute does not offer capacity guarantees.
The Benefits of Azure Savings Plans
Azure Savings Plan benefits offer a few key advantages for businesses looking to optimize their cloud costs and save money, including:
Streamlined management
Azure Savings Plans simplify your cloud cost management, as you don’t need to track individual resource reservations or worry about resource coverage. The plans automatically apply to your eligible resources, prioritizing the highest-cost items. This hands-off approach lowers administrative overhead and ensures you’re always maximizing your savings.
Easier budgeting and forecasting
Budgeting also becomes more predictable with a fixed hourly commitment that an Azure Savings Plan offers. You know exactly what you’ll be spending on your resources each month, making it easier to forecast and plan your IT expenses accordingly.
Having defined budgets and improved predictability helps your finance team align cloud expenditures with broader financial goals and make better commitment decisions.
Cost efficiency
Another core benefit of Azure Savings Plans is the significant cost savings of up to 65% on eligible resources. This allows businesses to lower their cloud expenses without sacrificing performance, helping you maximize your cloud ROI.
The savings apply automatically to your highest-cost eligible resources, ensuring you get the most value from your commitment. And you’ll see the benefits immediately, without waiting for credits or rebates.
Spend-based flexibility
One of the most powerful advantages of Azure Savings Plans is their horizontal flexibility. Unlike RIs, which are restricted to specific instances, Savings Plans allow you to commit to a certain spend measured in dollars/hour. In other words, you’re not locked into specific resource configurations. Instead, your organization can change instance types, regions, etc., giving you the flexibility to adapt as needed while still realizing savings.
Considerations for Azure Savings Plans
The main thing to consider before signing up for Azure Savings Plans is your future resource needs. To minimize risks, carefully evaluate the following:
Commitment lock-in Risk
When you opt for an Azure Savings Plan, you agree to spend a fixed amount per hour for either one or three years. This commitment can be a double-edged sword — it provides predictable costs and significant discounts, but you can’t just walk away if your needs change or you find a better deal elsewhere because any unused portion of the commitment is forfeited.
Thus, make sure you’re confident that the commitment will meet your long-term needs before signing on the dotted line.
Planning and management requirements
Your Savings Plan isn’t a set-it-and-forget-it tactic. You need to analyze your historical usage patterns regularly to determine the right commitment level. Too low, and you miss out on savings. Too high, and you overpay.
Say you analyze your Microsoft Azure usage over the past 30 days and find that you typically spend around $800 per hour on compute resources. If you decide to commit to a $1,000-per-hour Savings Plan without considering potential fluctuations in workload, you risk overcommitting and incurring cloud waste.
Make sure you have the expertise to understand these complexities, pricing fluctuations and you can leverage tools like Azure Advisor, which offers personalized recommendations for such discount instruments based on actual usage patterns.
Complexity of ongoing maintenance
Managing an Azure savings plan requires ongoing attention and expertise. You’ll need to:
- Monitor usage regularly
- Adjust resource allocation as needed
- Optimize workloads to maximize savings
- Stay up-to-date with Azure’s pricing and feature changes
This complexity can be especially challenging for smaller organizations without dedicated cloud FinOps teams. You might find yourself spending more time on management than you anticipated, so consider using Microsoft Azure’s built-in tools like Microsoft Cost Management or fully automated rate optimization platforms like ProsperOps to help streamline the process from the start.
Lack of modification or cancellation
When purchasing an Azure Savings Plan, your business must be confident in its commitment level, as these plans cannot be modified or canceled. This lack of flexibility means that if your cloud usage declines unexpectedly due to overestimating needs, seasonal fluctuations, or unforeseen reductions in workload, you cannot reduce your commitment.
Remember, unused capacity doesn’t roll over to future periods. If you don’t use it within the committed time frame, you lose it, which can impact your overall cost optimization efforts.
How Do Azure Savings Plans Work?
Here’s how Azure Savings Plans work:
Commitment to usage
The Azure Savings Plan operates on a basic principle: You commit to a consistent amount per hour over a specified term — either one year or three years. Your commitment applies to a range of eligible Azure services, such as Azure Virtual Machines, Azure App Service, and Azure Functions.
If your enterprise commits to spending $500 per hour, you’re billed this amount regardless of actual usage. So, even if your organization’s compute needs fluctuate and fall below this commitment, you’re still responsible for the full hourly rate.
This is why you need to accurately assess future compute needs before making a commitment to avoid potential waste.
Scoping discounts to specific subscriptions or resource groups
Using scoping options, you can control whether your Savings Plan applies to a:
- Single subscription
- Multiple subscriptions
- Management group level
In other words, if your company has multiple subscriptions supporting various applications, you can apply your Savings Plan benefits across all of them. This flexibility helps you optimize overall cloud spending and ensure you maximize your discounts by applying them where they’re most needed.
Billing for committed and excess usage
Your Microsoft Azure bill will reflect your:
- Committed usage: This is billed at the discounted rate up to your hourly commitment cap.
- Excess usage: Any usage beyond your commitment bills at regular pay-as-you-go rates.
You’ll receive a bill for your committed hourly spend regardless of actual utilization. However, any usage beyond the committed amount will be billed at the standard pay-as-you-go rate. For example, if your company commits to $500 per hour but uses only $400 in one hour, you will still pay $500. If usage spikes to $600, you’ll pay $500 for the committed amount, plus $100 at the higher pay-as-you-go rate for the extra usage.
Note that the $100 of extra usage will not equate to the same capacity of resources as the original $500. This is because the committed $500 is discounted under the Savings Plan. The extra $100 will be charged at the higher pay-as-you-go rate, meaning the cost per unit of compute for that excess is more expensive. Again, this underscores how important it is for you and your team to accurately forecast resource needs.
Tips for Using Azure Savings Plans Effectively
Signing up for an Azure Savings Plan comes with some risks, but the following tips will help you maximize your savings and limit the chances of over or under-committing:
Regularly monitor and adjust usage
Set reminders to regularly monitor your resource usage and cloud cost savings plan performance. The goal here is to adjust your commitments based on actual consumption to avoid missing out on potential savings. You should aim for a utilization rate close to 100% to maximize cost efficiency.
Use specific tools in the Azure portal, like Azure Monitor, to keep an eye on usage. You’ll be able to track data and adjust your commitments — either by reducing your hourly spend or reallocating resources to better match actual usage.
Leverage Azure Cost Management and Billing
Microsoft Cost Management and Billing is a free suite of tools that gives you detailed insights into Azure costs, which you can use to identify opportunities for savings.
For example, the Cost Analysis tool helps you monitor total and average costs, compare spending across periods, and use filters to drill down into specific resources or services.
You can customize views to track costs by different dimensions, such as subscriptions, resource groups, or services, and even break down costs by day, month, or custom timeframes. It also supports saving and sharing customized reports, setting budget alerts, and exporting data for further analysis using Power BI or CSV files.
Leverage Effective Savings Rate for benchmarking:
Effective Savings Rate (ESR) is an objective industry benchmark that calculates the actual ROI of your cloud discount instruments. It combines utilization, coverage, and discount percentages into a single metric, giving you the most accurate measure of how well your commitment plans are performing.
Tracking and comparing your ESR against industry benchmarks gives you a clear indication of how well you’re optimizing your cloud costs compared to others in the market.
Use an autonomous discount management tool
An autonomous discount management tool massively improves your Azure Savings Plans performance and overall cloud cost management. Tools like ProsperOps use advanced algorithms and machine learning to assess resource usage patterns, manage discount instruments automatically, and minimize commitment risks. Look for tools that run 24/7 and involve minimal effort on your part, so can focus on running your business.
Automatically Optimize Your Azure Costs With ProsperOps
ProsperOps delivers cloud savings-as-a-service and leverages its Autonomous Discount Management platform to optimize Microsoft Azure’s native discounts to reduce your cloud spend and place you in the 98th percentile of FinOps teams.
Using machine learning algorithms and advanced data analytics, ProsperOps can continuously analyze your company’s Azure usage patterns to identify inefficiencies and autonomously manage a portfolio of commitments. With our Adaptive Laddering approach, we safely increase coverage while minimizing lock-in risk from commitments.
By blending your discount instruments, such as Azure Savings Plans, and Azure Reserved VM Instances, we help you maximize Effective Savings Rate while lowering Commitment Lock-in Risk. We remove the effort, latency, and lock-in risk associated with manually managing rigid, long-term commitments, and fully automate cloud rate optimization for you.
With ProsperOps automation, there is no impact on engineering. Our platform setup is quick, and our systems work behind the scenes to optimize your cloud costs. This allows your teams to concentrate on innovation and growth while we automate cloud cost optimization for you.
To see ProsperOps in action, book a demo today.
