As The 20 MSPs continue to evolve and build successful cloud practices in Microsoft Azure, one of the more frequent questions we receive at Nerdio is “How do I make money selling Azure?” MSPs should always be on the lookout for how Azure can improve their own business needs—namely decreased costs and higher gross profit margins. One of the best ways to do this is familiarizing yourself and deploying Azure Reserved Instances. Let’s talk about how that works.
The cost of Virtual Machines in Azure is the single biggest component of a typical MSP’s IT environment. Therefore, focusing on reducing this large consumption component is a great place to start. The savings are significant but carry a bit of complexity and need some up-front planning to take advantage of them.
Microsoft’s hyper-scale data center strategy has allowed the company to deploy many global regions at great cost to the company. As Azure adoption continues to rapidly grow, Microsoft needs to forecast demand in the various regions, which is far from trivial since public cloud is primarily advertised as a pay-as-you-go utility where you could run a VM one day and turn it off the next. To help with this forecasting challenge and to reward customers who are willing to commit to a certain amount of compute capacity in a specific region for an extended period, Microsoft introduced Reserved Instances (RIs). These RIs can save you from 20% to 57% relative to the list Pay-As-You-Go (PAYG) price.
RIs are reservations of a specific type of compute capacity (i.e., VM family/series) in a specific geographic location (i.e., Azure region) for a predefined period (12 or 36 months). Depending on the VM family, duration of the reservation, and region, these RIs can save you from 20% to 57% relative to the list Pay-As-You-Go (PAYG) price. The trade-off is that you have to pre-pay for the reservation in advance. This is great news for MSPs because typical IT workloads they deploy in Azure on behalf of their customers are persistent and customers are generally open to making one or three-year commitments.
Let’s explore how these RIs work.
When you provision a VM in Azure, two billing meters start running: base compute and Windows Server license. The published PAYG rate includes both components and every plain, vanilla VM you power on will bill you for both. RIs stop the base compute meter.
RIs are purchased with a lump sum payment via the CSP program and are applied to your tenant or subscription. Any VM running inside of that subscription that “matches” the RI will have its base compute rate zeroed out on the next invoice. Remember that RIs are purchased on a per-VM-family, per-region basis. This means that it will only match to a VM or set of VMs if they are of the same family and in the same region as the RI.
With Instance Size Flexibility, Microsoft will automatically apply any reservations in the most advantageous way to reduce the bill – if the VMs are running in the same region and have the same family as the RI. Keep in mind that RIs are a billing concept. There is nothing that needs to be done on the VM itself to stop its base compute meter and utilize the reservation. Azure does that automatically upon issuance of the invoice.
What if you need to change your reservation from one VM family to another or move your VMs to another Azure region?
No problem! RIs can be exchanged without any fees or penalties. Any unused portion of an RI will be applied as a credit towards the purchase of a new RI for a different family, in a different region, or both.
What if you need to cancel a reservation?
This is also possible, but there is a cancellation fee. The cancellation fee is 12% of your purchase price. The unused portion of your reservation will be refunded to you minus the 12% cancellation fee. There are some limitations to this on an annual basis. For example, your cancellations cannot exceed $50,000 in a year.
Let’s stop and think about this for a minute from the perspective of an MSP. The worst-case scenario is a 12% cancellation fee on a reserved instance of a VM they may no longer need in the future. However, the savings is anywhere from 20% to 57%. Therefore, cash flow considerations aside it makes sense to reserve all VMs even if they may need to be exchanged (no fee) or cancelled later (12% fee).
What if your customer cancels your managed service agreement? You have three options:
1. If you have no other customers who can make use of Azure VMs you will be forced to cancel the reservations and pay the 12% early termination fee. However, remember that your savings should more than pay for the early termination fee even in this worst-case scenario.
2. If you have other customers or are bringing in new customers who can make use of reserved Azure VMs, but who need different types of VMs or need to be in a different region, then you would exchange your reservations – at no charge – and extend them to 12 or 36 months.
3. If you have other customers or are bringing in new customers who can make use of the reserved instances in the same region and same VM family, then there is nothing else for you to do. By setting the RIs to shared scope and having all your customers under one tenant with individual subscriptions, the RIs will just keep working for you and stopping the base compute meter on VMs.
What about cashflow?
You may be concerned that having to come up with 36 or even 12 months’ worth of Azure VM fees is a burden on your company. There are financing companies specializing in working with MSPs who will finance the purchase of Reserved Instances. This way you’ll get the benefit of the RI discount but keep the cash outlay monthly. There is obviously going to be a financing fee associated with this, but with savings of up to 57% it’s still worthwhile.
In summary, RIs or reservations are a significant lever to save up to 57% of compute costs, which is the single biggest cost component of an Azure IT environment, and dramatically increase your margins. They do require some advance planning, budgeting, and structuring of your Azure account the right way, but can significantly increase the profitability of your Azure practice. On top of the inherent savings you get with reservations, you may also get anywhere from a 2%-5% discount as a CSP Direct or CSP Reseller. As you can see, discounts start to stack up and free up margin to be used in better ways.
Interested in learning more? Don’t miss Nerdio at The 20’s upcoming VISION Conference!
Joseph Landes is the Chief Revenue Officer at Nerdio—a cloud company whose mission is to enable MSPs to build successful cloud practices in Microsoft Azure. He previous worked at Microsoft for 23 years leading high performing international sales and marketing teams. When not visiting MSPs you can find him trying to visit every country in the world or reading great literary fiction.