Understanding Azure Pricing Models
Azure offers five distinct pricing models, and choosing the right one for each workload can cut your bill by 40–70%. Understanding how each model works — and when it applies — is the first step to managing cloud spend effectively.
Pay-As-You-Go (PAYG)
Pay-as-you-go is the simplest and most flexible Azure pricing model. You pay only for what you consume, billed by the second or hour depending on the resource type. There is no upfront commitment, no minimum spend, and you can stop resources at any time.
PAYG is ideal for development and test environments, unpredictable workloads, and situations where you are still sizing your infrastructure. The trade-off is that PAYG rates are the most expensive per unit — Azure charges a premium for the flexibility.
Example PAYG VM costs (East US, March 2026)
A Standard_D4s_v5 VM (4 vCPUs, 16 GiB RAM) running 24/7 costs approximately $0.192/hour on PAYG. That equals roughly $140/month or $1,670/year. For a workload that genuinely needs to run all the time, this is a poor choice of pricing model.
Reserved Instances (RIs)
Reserved Instances let you commit to using a specific VM size, region, and OS for either 1 year or 3 years in exchange for a significant discount. The commitment is financial, not technical — you still get the same VM type, and Azure simply charges you less per hour.
Discount rates for Standard_D4s_v5 (East US, Linux)
| Pricing Model | Hourly Rate | Monthly Cost | Annual Cost | Savings vs PAYG |
|---|---|---|---|---|
| Pay-As-You-Go | $0.192 | ~$140 | ~$1,682 | — |
| 1-Year Reserved (monthly) | ~$0.117 | ~$85 | ~$1,024 | ~39% |
| 1-Year Reserved (upfront) | ~$0.110 | ~$80 | ~$962 | ~43% |
| 3-Year Reserved (upfront) | ~$0.075 | ~$55 | ~$656 | ~61% |
Reserved Instances are applied automatically to matching VMs in your subscription — you do not need to assign them manually. If you have a D4s_v5 running in East US and you purchase a matching RI, the discount applies immediately to the billing.
RIs can be exchanged for different sizes in the same family or cancelled for a small early-termination fee (up to 12% for cancellations). This makes them significantly less risky than they might appear.
Use the Azure Cost Management recommendations blade to see which VMs in your subscription would benefit most from Reserved Instances. Azure analyses your last 7, 30, or 60 days of usage and calculates expected savings automatically.
Azure Savings Plans
Savings Plans are a more flexible alternative to Reserved Instances, introduced in 2022. Instead of committing to a specific VM size and region, you commit to a fixed hourly spend (e.g., $10/hour) across any eligible compute services. Azure applies discounts automatically to the highest-priced resources first.
Savings Plans support VMs, Azure Functions (Premium plan), App Service, Azure Dedicated Host, and Azure Container Instances. They are region-independent, which means they work across all Azure regions without needing separate purchases per region.
Typical Savings Plan discounts are slightly lower than RI discounts for a like-for-like comparison — around 20–40% for a 1-year commitment — but the flexibility often makes up for the smaller discount, especially in organisations running mixed workloads across regions.
Spot VMs
Spot VMs use spare Azure capacity at dramatically reduced prices — typically 60–90% cheaper than PAYG. The catch is that Azure can evict your Spot VM with just 30 seconds notice when it needs the capacity back.
A Standard_D4s_v5 that costs $0.192/hour on PAYG might cost $0.019–$0.050/hour on Spot, depending on current demand. For batch processing, CI/CD pipelines, machine learning training jobs, and stateless workloads, Spot VMs are extremely cost-effective.
Spot VM pricing fluctuates based on supply and demand. The Azure portal shows the current price and eviction rate for each size and region combination. Sizes with eviction rates below 5% are generally safe for batch workloads with moderate restart tolerance.
Azure Hybrid Benefit
If your organisation has existing Windows Server or SQL Server licences with Software Assurance, Azure Hybrid Benefit lets you use those licences on Azure VMs instead of paying for new licences. This effectively removes the Windows or SQL licensing cost from your VM bill.
For a Windows Server Standard_D4s_v5, the PAYG rate is approximately $0.384/hour (including Windows licensing). With Azure Hybrid Benefit applied, the same VM drops to $0.192/hour — a 50% reduction purely from licence reuse. Combined with a 3-year Reserved Instance, the total saving can reach 70–75%.
Combining discounts
Azure pricing discounts stack in specific ways. Reserved Instances and Savings Plans apply to the compute portion. Azure Hybrid Benefit applies to the licence portion. Spot pricing replaces the base compute rate entirely. You cannot combine Spot with Reserved Instances on the same VM, but you can use Hybrid Benefit with Spot.
Free Tier and Always-Free Services
Azure provides two categories of free resources:
- 12-month free services: 750 hours/month of B1s VM (Linux), 5 GB of Blob Storage, 250 GB of SQL Database storage, and more. These expire after 12 months from account creation.
- Always-free services: 1 million Azure Functions requests/month, 5 GB of Azure Cosmos DB storage, 10 web/mobile apps on Azure App Service Free tier, Azure DevOps for up to 5 users, and others. These never expire.
The free tier is useful for learning and experimentation but has hard limits. A B1s VM with 1 vCPU and 1 GiB RAM is not suitable for production workloads, and the 750-hour monthly limit means only one free VM running continuously.
How Individual Services Are Priced
Beyond compute, every Azure service has its own pricing dimensions. Understanding what drives cost for the services you use is critical:
- Storage: Charged per GB stored per month, plus per-operation charges (read, write, list). Azure Blob Storage in East US costs approximately $0.018/GB/month for hot tier, $0.01/GB/month for cool, and $0.00099/GB/month for archive.
- Networking: Inbound data is free. Outbound data (egress) from Azure to the internet costs $0.087/GB for the first 10 TB/month. Data transferred between Azure regions costs $0.02/GB.
- Managed databases: Azure SQL Database pricing depends on the service tier (DTU-based or vCore-based), compute tier, and storage. A General Purpose 4 vCore instance costs approximately $0.724/hour plus storage at $0.115/GB/month.
- Serverless compute: Azure Functions Consumption plan charges $0.20 per million executions and $0.000016 per GB-second of execution. The first 1 million requests and 400,000 GB-seconds per month are free.
Tools for Understanding Your Costs
Azure provides several tools to help you understand and estimate costs before and after deployment:
- Azure Pricing Calculator: estimate costs for any combination of services at
azure.microsoft.com/en-us/pricing/calculator/ - Azure Cost Management + Billing: analyse actual spend, set budgets, and get AI-driven recommendations
- Azure Advisor: identifies cost optimisation opportunities based on your actual usage patterns
- Total Cost of Ownership (TCO) Calculator: compares on-premises vs Azure costs for migration planning
# View current billing period spend via CLI
az consumption usage list \
--billing-period-name $(date +%Y%m) \
--query "[].{resource:instanceName, cost:pretaxCost}" \
--output table
# Get cost recommendations from Azure Advisor
az advisor recommendation list \
--category Cost \
--query "[].{title:shortDescription.solution, impact:impact}" \
--output tableCommon Mistakes
- Assuming PAYG is fine long-term. PAYG rates are designed for flexibility, not efficiency. Any predictable workload running more than 6 hours per day is almost certainly cheaper with a Reserved Instance or Savings Plan.
- Buying Reserved Instances before understanding usage patterns. Purchase RIs after at least 30 days of real usage data. Azure Cost Management shows RI recommendations based on your actual consumption history.
- Ignoring egress costs. Many teams are surprised by data transfer charges. Moving 10 TB of data from Azure to the internet costs approximately $870 — that is a significant line item on a cost report.
- Forgetting support plan costs. Azure support plans range from $0 (Basic) to $1,000+/month (Unified). These appear as separate charges on your bill and are not reflected in per-resource estimates.
Summary
- Azure has five main pricing models: PAYG, Reserved Instances, Savings Plans, Spot, and Hybrid Benefit. Most production workloads benefit from combining multiple models.
- Reserved Instances save 39–61% vs PAYG for predictable compute workloads. Spot VMs save 60–90% for fault-tolerant workloads.
- Every service has its own pricing dimensions — storage, operations, compute, and egress all contribute to total cost.
- Use the Azure Pricing Calculator before deploying, and Azure Cost Management after, to track and optimise spend.
Frequently asked questions
What is the default Azure pricing model?
Pay-as-you-go (PAYG) is the default. You are billed for exactly what you consume with no upfront commitment. Rates are higher than reserved options but there is no lock-in period.
How much can I save with Azure Reserved Instances?
Reserved Instances typically save 40–72% compared to pay-as-you-go prices for VMs, depending on the term (1-year vs 3-year) and payment option (upfront vs monthly).
Is the Azure free tier truly free?
The free tier includes 12 months of selected services (e.g., 750 hours of B1S VM per month), always-free services (e.g., 1 million Azure Functions requests/month), and a $200 credit for 30 days. Beyond those limits, standard rates apply.