We're a dev shop. Having a VM farm has saved our IT guys so much time and money.
We used to buy dedicated boxes - some projects would get their own, most would share on some conglomerate box. Weird shit happened, stuff would never get uninstalled after a project was over, and people would be tripping over each other all the time (One person needs to reboot a box, the other was trying to debug some arcane issue). In short: a nightmare.
Now, we buy a AUD$6k box from $brand, hook it up to our SAN, and run anywhere up to 24 VMs on that one box at once.
Each project gets one VM, possibly two or three if we need to simulate complex setups, or need multiple concurrent environments. If one project needs to do something resource heavy like do load testing, we can allocate a bunch more resources, set up a virtual network with a series of load-testing clients on a 10GbE network, and have at it usually without affecting other projects.
At the end of a project, we shut the VMs down for that project, and eventually archive them off. If a client comes back needing changes - that VM can be back online within 15 minutes. It's still in the same state as when we last worked on the project - its a bit more difficult to do that with physical hardware.
Our internal 'production' servers (email, source control, wiki, intranet, etc) are all virtualised too - although they get their own dedicated hardware pool where appropriate.
Backups are as simple as snapshotting the SAN and exporting the backup to tape. Push one button, and in a few hours go to the server room to pick up tapes. Having a huge number of boxes needing to run the backups themselves takes longer, and is generally more error prone.
Even for client production environments we recommend clients use Virtualisation. Most of our clients don't need bare metal performance, and it's generally better (cheaper, faster throughput) to simply clone an existing machine and load-balance the VMs, than go to bare-metal OS+app installs.
If something weird goes on with the production instance that we can't reproduce - we get snapshots sent over.
I'm not sure we could go back to pre-virtualisation now.