Understanding Token Architecture
API costs are calculated strictly by the volume of text processed (Input Tokens) and generated (Output Tokens). A token is a fragmented chunk of a word. As a general industry rule across OpenAI and Anthropic tokenizers, 1 token equates to approximately 4 characters or 0.75 English words.
The Mathematical Cost Equation
When engineering an AI SaaS platform, developers calculate variable infrastructure burn rates using the following standard equation:
Why Output Tokens Cost 3x More
Output (Generated) tokens are universally more expensive than Input (Prompt) tokens due to hardware physics. Input tokens can be processed in parallel by the GPU across the entire Context Window simultaneously. Output tokens, however, must be generated auto-regressively (one by one), consuming significantly more compute cycle time and VRAM bandwidth on the cloud cluster.