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Little Math: When to purchase Azure instance reservation

Azure offers instance reservation for 1 or for 3 years with a great discount that you shouldn’t miss.

PAY as You Go prices is good for short term, spiky usage, while reservation is fit for long term 7×24 hours running virtual machines.

What is the challenge that who has solid view what will happen in 3 years, meaning application architecture unchanged, capacity will be only increasing, etc.
It is better as it seems, about 1.5-2 years forecast is enough, let us see the details.

Firstly, let me highlight that only the 7×24 running instances are worth to reserve. If VM can be shut down during night or for the weekends, it can be 70% cost saving without reservation, never forget.

Back to reservation, let us calculate the total cost of ownership comparing options for

  • Pay as you go prices
  • 1 year reservation iteratively
  • 1 year reservation and pay as you go
  • 3 years reservation

Below chart shows the TCO for each month in case of a D16s v3 CentOS/Ubuntu instance located in East US.

The dashed red line shows the lowest TCO.

Typically, the VM lifespan can be estimated only with likelihood. There is a possible pitfall here, that VM is reserved for 1 year and after 12 months it is reserved for additional 1 year which is the same cost as it would have been reserved for 3 years originally.

Similarly, there is a risk that after 19 months the instance is not decommissioned as a project may be delayed or whatever reason. Therefore, it could be considered to reserve the instance for 3 years if the instance is expected to be running for more than 14 months where 3 years reservation TCO is smaller than PAYGO.

The reservation rule depends on how long the instance possible to be running:

  1. Less than 7 months, keep it with PAYGO
  2. Running between 7 – 14 months, reserve for 1 year and keep PAYGO
  3. Running more than 14 months, reserve for 3 years.

 

The 7,14 and 19 “magic numbers” varies on the instance type prices, practically depends on the RI discounts, easily calculated with the formulas below.

Risk can be handled by having a “portfolio”, keeping x% of the instances with 3 years reservation while let other fraction reserving for 1 year and the remaining for PAYGO.

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