Token Economics: Understanding AI Costs
AI APIs charge per token. Learn how tokens work, how to estimate costs, and how to optimize spending.
TL;DR
Tokens are chunks of text (roughly 4 chars or Ā¾ of a word). AI APIs charge per token for both input and output. Understanding tokens helps you estimate costs and optimize usage.
What is a token?
Not a wordāa sub-word unit:
- "Hello" = 1 token
- "ChatGPT" = 2 tokens (Chat + GPT)
- "Internationalization" = 5 tokens
Rule of thumb:
- 100 tokens ā 75 words
- 1 token ā 4 characters
How tokenization works
- Text is split using a tokenizer
- Common words = 1 token
- Rare words split into parts
- Punctuation and spaces count
Example:
"I'm learning about AI tokens."
ā ["I", "'m", " learning", " about", " AI", " tokens", "."]
= 7 tokens
Why tokens matter
Pricing:
- Most APIs charge per 1000 tokens
- Both input (prompt) and output count
- Longer conversations = higher cost
Context limits:
- Models have token limits (4k, 8k, 128k)
- Includes prompt + response
- Going over = error or truncation
Typical pricing (as of 2024)
GPT-4:
- Input: $0.03 per 1K tokens
- Output: $0.06 per 1K tokens
- $0.30 per conversation (10K tokens)
GPT-3.5:
- Input: $0.0005 per 1K tokens
- Output: $0.0015 per 1K tokens
- 20x cheaper than GPT-4
Claude (Anthropic):
- Similar to GPT-4
- Sonnet: Mid-tier pricing
- Haiku: Cheapest option
Estimating costs
Simple calculation:
- Count tokens in your prompt (use tokenizer tool)
- Estimate output length
- Multiply by price per 1K tokens
Example:
- Prompt: 500 tokens
- Response: 1000 tokens
- Total: 1500 tokens
- Cost (GPT-4): $0.075
How to reduce token usage
Shorter prompts:
- Be concise
- Remove unnecessary context
- Use system messages efficiently
Limit output:
- Set max_tokens parameter
- Request shorter responses
Batch processing:
- Process multiple items in one call
- Amortize prompt overhead
Choose the right model:
- GPT-3.5 for simple tasks
- GPT-4 only when needed
Cache conversations:
- Reuse responses when possible
- Don't re-generate identical content
Hidden costs
- Retries and failures
- Testing and debugging
- Unusedprompt engineering iterations
- Context accumulation in conversations
Monitoring costs
- Track API usage daily
- Set spending limits
- Monitor per-user or per-feature costs
- Alert on anomalies
What's next
- Context Windows
- Prompt Engineering for Cost
- Model Selection Guide
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Key Terms Used in This Guide
Token
A chunk of text (usually a word or part of a word) that AI processes. 'Chatbot' might be one token or split into 'chat' and 'bot'.
AI (Artificial Intelligence)
Making machines perform tasks that typically require human intelligenceālike understanding language, recognizing patterns, or making decisions.
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