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I'm trying to understand how App Service and App Service Plans relate.

From what I understand from the docs, all webapps in a plan run on all instances in that plan. This means that adding more instances runs more copies of the existing webapps but it doesn't create capacity for new webapps. i.e. if I have 2 instances with 4Gb RAM each, and 4 webapps that each need 1Gb heap, all the RAM is allocated. Adding more instances (scaling out) won't create space to add a new webapp, I would need to scale up but that has it's limits.

Is there anyway to have a plan with e.g. 5 instances but each webapp only runs on 2 of them? This way adding more instances would create space to add more webapps?

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No, this is not possible. The recommendation would be to have separate App Service Plans. This has the added advantage of isolating the apps from each other - if one app's resource utilization suddenly spikes it will not impact apps in other App Service Plans.

See my answer to a similar question on StackOverflow.

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