What Are Tokens and Why Do They Cost Money?

If you've ever looked at AI pricing, you've seen the word "tokens." It's the core unit of AI consumption, and understanding it helps you predict costs.

What is a token? A token is a chunk of text — roughly three-quarters of a word. "The quick brown fox" is about 4 tokens. A typical business email is 200-400 tokens. A 10-page report is roughly 3,000-4,000 tokens. You're charged for both input (your prompt) and output (the response).

Why this matters for cost. Most business subscriptions include a generous monthly allowance. But if you're building AI into automated workflows — processing every support ticket or generating nightly reports — token costs become a real budget line. Processing 1,000 support tickets with a mid-tier model costs roughly $2-10.

The efficiency angle. Shorter, well-crafted prompts use fewer tokens and produce better results. A verbose, poorly structured prompt costs more and returns worse output than a concise one. Good prompting is literally cost-efficient.

The trend. Token prices have fallen roughly 90% in the past 18 months. What costs $100 today may cost $10 a year from now. This deflationary trend is what makes increasingly ambitious AI applications economically viable for SMBs.