What Is Prompt Caching? How to Reduce LLM API Costs in 2025

Have you ever walked into your favorite coffee shop and had the barista remember your usual order? You don’t even need to speak; they’re already preparing your grande oat milk latte with an extra shot. It’s quick, effortless, and personal.

Now imagine if your AI model worked the same way. Instead of starting from scratch with every request, it could “remember” what you’ve already told it, your product docs, FAQs, or previous context, and simply build on that knowledge.

That’s what prompt caching does. It lets AI reuse repeated information instead of reprocessing it, cutting your API costs by up to 75% and reducing latency by nearly 80%. Sounds powerful, right? Let’s see exactly how it works and how you can start saving money with it today.

What Is Prompt Caching?

Prompt caching is a technique used in AI systems to store and reuse the results of previously processed prompts, instead of sending the same or similar request to an AI model every time.

When a user submits a prompt that has already been handled before, the system retrieves the stored response from the cache rather than recomputing it from scratch. This significantly reduces processing time, lowers infrastructure costs, and improves overall system efficiency.

In simple terms, prompt caching allows AI applications to “remember” past prompts and their outputs so repeated requests can be served instantly.

Imagine you're building a customer support chatbot for a company. Every time a customer asks a question, you need to send the AI model:

1. The context (your entire product documentation, FAQs, company policies, maybe 50,000 words)
2. The customer's question (a few sentences)

Without caching, here's what happens on every single request:

Request 1: [50,000 words of docs] + "How do I reset my password?"  

Request 2: [50,000 words of docs] + "What's your refund policy?"  

Request 3: [50,000 words of docs] + "Do you ship internationally?" 

See the problem? You're sending those same 50,000 words over and over again. The AI has to process them every single time, which means:

• You're paying to process the same content repeatedly
• Each request takes longer because the model has to "read" everything again
• Your API bills are unnecessarily high

Prompt caching solves this. It's like the AI saying, "Hey, I remember those 50,000 words from a few seconds ago. Just tell me the new question, and I'll use what I already have in memory."

Here's what it looks like with caching:

Request 1: [50,000 words of docs] + "How do I reset my password?"  (AI caches the docs)  

Request 2: [CACHED] + "What's your refund policy?"  

Request 3: [CACHED] + "Do you ship internationally?"  

The AI only processes those 50,000 words once, then reuses them for subsequent requests. Brilliant, right?

What Happened When We Tested Prompt Caching?

We ran an experiment to see just how much difference prompt caching makes. Built a simple system that answers questions about various products. Think of it like a smart FAQ bot. Here's what I found:

The Setup

• 48 total requests across different knowledge bases
• 11 requests without caching (cold starts, first time seeing the content)
• 37 requests with caching (subsequent requests with cached content)

The Results

Cost Savings:

• Average cost per request WITHOUT cache: $0.034
• Average cost per request WITH cache: $0.017
• Savings: 50.5% 

Let's put that in perspective:

If you're running a production application with thousands of daily requests, that's real money.

Speed Improvements:

• Average latency WITHOUT cache: 8.9 seconds
• Average latency WITH cache: 6.9 seconds
• Improvement: 23% faster 

Cache Effectiveness:

• 93.8% of tokens were cached across all requests.
• That means only 6.2% of the content needed to be processed fresh.

Why Does This Work So Well?

This happens because of how AI models process text. When you send a prompt to GPT-4 or Claude, the model has to:

1. Tokenize the text (break it into pieces)
2. Encode it (convert to numbers the model understands)
3. Process it through multiple layers of neural networks
4. Generate a response

Steps 1-3 are computationally expensive, especially for large contexts. With caching, the model says, "I've already done steps 1-3 for this content. Let me skip straight to processing the new part and generating a response."

It's like the difference between:

• Reading an entire textbook every time you need to answer a question (no cache)
• Keeping the textbook open and just reading the new question (with cache)

How to Use Prompt Caching?

We have given the example below with OpenAI.

You don't have to do anything special. OpenAI automatically caches repeated content for you.

from openai import OpenAI  
  
client = OpenAI(api_key="your-api-key")  
  
# Your large context (documentation, knowledge base, etc.)  
large_context = """  
[Your 50,000 words of product documentation here]  
"""  
  
# First request - no cache yet  
response1 = client.chat.completions.create(  
    model="gpt-4o",  
    messages=[  
        {"role": "system", "content": large_context},  
        {"role": "user", "content": "How do I reset my password?"}  
    ]  
)  
  
# Second request - automatically uses cached context!  
response2 = client.chat.completions.create(  
    model="gpt-4o",  
    messages=[  
        {"role": "system", "content": large_context},  # Same context  
        {"role": "user", "content": "What are the pricing plans?"}  
    ]  
)  

That's it. No special parameters, no configuration. OpenAI detects that you're sending the same content and automatically caches it.

How to check if caching worked:

usage = response2.usage  
  
print(f"Prompt tokens: {usage.prompt_tokens}")  
print(f"Cached tokens: {usage.prompt_tokens_details.cached_tokens}")  
print(f"New tokens processed: {usage.prompt_tokens - usage.prompt_tokens_details.cached_tokens}")  

If cached_tokens is greater than 0, congratulations you're saving money! Open AI provides a 50 % discount for cached tokens.

Image Source- https://openai.com/index/api-prompt-caching/ 

Output Response:

ChatCompletion(id='chatcmpl-CYrUiaWx23iM7lcKP5p072mflisoh', choices=[Choice(finish_reason='stop', index=0, logprobs=None, message=ChatCompletionMessage(content='The pricing plans for the Property Management Software platform are as follows:\n\n### Starter Plan - $1 per unit/month\n- Up to 100 units\n- Basic property management\n- Tenant portal\n- Online rent collection\n- Work order management\n- Email support\n\n### Professional Plan - $1.50 per unit/month\n- 101-500 units\n- Everything in Starter\n- Owner portal\n- Advanced reporting\n- Marketing tools\n- Phone support\n- API access\n\n### Enterprise Plan - $1.25 per unit/month\n- 500+ units\n- Everything in Professional\n- Custom integrations\n- Dedicated account manager\n- Priority support\n- Custom training\n- White-label options\n\n### Add-ons\n- Tenant screening: $35 per application\n- E-signatures: $0.50 per signature\n- SMS notifications: $0.02 per message\n- Additional storage: $50/month per 100GB', refusal=None, role='assistant', annotations=[], audio=None, function_call=None, tool_calls=None))], created=1762424820, model='gpt-4o-2024-08-06', object='chat.completion', service_tier='default', system_fingerprint='fp_65564d8ba5', usage=CompletionUsage(completion_tokens=189, prompt_tokens=9073, total_tokens=9262, completion_tokens_details=CompletionTokensDetails(accepted_prediction_tokens=0, audio_tokens=0, reasoning_tokens=0, rejected_prediction_tokens=0), prompt_tokens_details=PromptTokensDetails(audio_tokens=0, cached_tokens=8192)))

Pricing Calculation:

Token Usage:

Prompt tokens: 9,073  

Cached Tokens: 8,192

Non-cached tokens = Prompt tokens - Cached Tokens =  881 

Completion tokens: 189 

Cost with Caching:

Non cached input price = $2.50 per 1M tokens 

Cached input price = $1.25 per 1M tokens (50% discount) 

output_price = $10.00 per 1M tokens

Non cached input cost = (881 / 1_000_000) * $2.50 = $0.002203

Cached input cost = (8192  / 1_000_000) * $1.25 = $0.010240

Output cost = (189 / 1_000_000) * $10.00 = $0.001890  

Total cost = $0.014332  

Cost without Caching:

Input cost = (9073 / 1_000_000) * $2.50 = $0.022682

Output cost = (189 / 1_000_000) * $10.00 = $0.001890  

Total cost = $0.02457

Savings = $0.02457 - $0.014332  = $0.010240 (41.7%)

Important notes:

• Minimum cacheable size: 1,024 tokens or more
• Cache increments: Cache hits occur in 128-token increments (1024, 1152, 1280, 1408, etc.)
• Cache lifetime: 5-10 minutes of inactivity (can persist up to 1 hour during off-peak periods)
• Works with: GPT-4o and newer models
• Cost savings: OpenAI can reduce costs by up to 75% and latency by up to 80%
• No extra fees: Caching happens automatically with no additional charges

How OpenAI's caching works:

OpenAI routes requests to servers based on a hash of your prompt's prefix (typically the first 256 tokens). If multiple requests share the same prefix, they're routed to the same server where the cache exists. This means:

• Requests are automatically routed to machines that recently processed the same prompt
• Cache hits are only possible for exact prefix matches
• If requests exceed ~15 per minute for the same prefix, some may overflow to other machines, reducing cache effectiveness

Real-World Use Cases of Prompt Caching

Prompt caching becomes extremely powerful in scenarios where the context stays the same, but the questions or actions keep changing. Here are the most common real-world applications where caching delivers massive cost and latency benefits:

1. Customer Support Chatbots (Large Knowledge Bases)

Imagine a support bot that relies on thousands of words of product documentation, FAQs, troubleshooting steps, or policy guidelines. Most customers ask different questions, but the background context rarely changes.

Why caching helps:

• The bot only processes the heavy documentation once
• Every subsequent question is cheap and fast
• Perfect for companies with high chat volumes or large support teams

This can cut daily operational costs dramatically for SaaS platforms, eCommerce stores, fin-tech support systems, and more.

2. Document Analysis & Q&A Systems

When users upload large documents, contracts, manuals, legal PDFs, research papers, they often ask multiple questions about the same file.

Why caching helps:

• The 100-page document is processed once
• Every follow-up question uses the cached representation
• Response times stay consistent even for massive files

This is ideal for legal tech, enterprise search, compliance workflows, and internal knowledge tools.

3. Code Review Assistants

Developers often upload entire codebases or large files and then ask multiple questions:

• “Why is this failing?”
• “How can I optimize this function?”
• “Explain this module.”

Why caching helps:

• The AI reads the big code block only once
• Each follow-up question uses the cached code
• Reviewing large repos becomes much cheaper and faster

Perfect for AI pair programming, static analysis tools, and debugging assistants.

4. AI Tutors & Educational Learning Systems

AI tutors often rely on a fixed textbook chapter, lesson, or learning module.

Why caching helps:

• The chapter is cached once
• Hundreds of students can ask questions rapidly
• Low cost even for intensive usage (quizzes, summaries, explanations)

Great for EdTech apps, university learning portals, and skill-based microlearning systems.

5. RAG (Retrieval-Augmented Generation) Applications

RAG systems fetch relevant documents from a vector database and pass them to the model for question answering.

Often, multiple users request answers about the same topics or the same documents.

Why caching helps:

• Repeatedly retrieved chunks hit the cache
• Each request gets cheaper and faster
• High-volume RAG workloads (e.g., internal knowledge assistants) benefit the most

This is especially useful for enterprise AI assistants, HR knowledge bots, SaaS help centers, and data-heavy AI tools.

6. AI Agents & Tool-Using Systems

AI Agents systems (coding agents, workflow agents, automation bots) often:

• Call multiple tools
• Iterate on code updates
• Repeatedly send the same system prompts
• Reuse function definitions or instructions

Why caching helps:

• Shared instructions and tool descriptions are cached
• Each new step becomes lighter and faster
• Multi-step agent workflows become significantly cheaper

Great for DevOps agents, no-code automation bots, agent-based orchestrations, and multi-step task automation.

7. Internal Enterprise AI Assistants

Companies use AI assistants for:

• HR queries
• employee onboarding
• IT troubleshooting
• policy lookup
• process explanations

Most of these answers pull from a fixed internal knowledge base.

Why caching helps:

• Policies and SOPs are processed once
• Every employee question hits the cache
• Massive savings at scale (especially for enterprises with 500+ employees)

When Prompt Caching Doesn't Help? 

Prompt caching is powerful, but it’s not a one-size-fits-all solution. There are several cases where caching won’t kick in or provides little to no benefit. Understanding these limitations helps you design systems that actually take advantage of caching instead of relying on it blindly.

1. Every Request Contains a Completely Unique Context

Caching only works when the repeated part of the prompt remains the same. If every API call has a brand-new document, webpage, or dataset, there’s nothing for the model to reuse.

Example:

• Request 1: Summarize Article A
• Request 2: Summarize Article B
• Request 3: Summarize Article C

Each request includes different content, so the model must reprocess everything from scratch.

Typical scenarios:

• News summarizers
• Web scrapers
• Document-by-document generators

2. Your Context Changes Too Frequently

If the underlying content updates rapidly (every few seconds or minutes), the cached version becomes outdated before the next request even arrives.

Examples:

• Real-time dashboards
• Financial data feeds
• Rapidly changing product inventories

Caching helps most when your context is stable, not constantly shifting.

3. Very Low Request Volume

Caches have a short lifetime (5–10 minutes on OpenAI, sometimes up to 1 hour during low load). If your system only makes a handful of requests per day or hour, the cache will expire between requests.

Example:

• A support bot that gets 1–2 queries per hour
• A backend service used only during specific business hours

Caching shines when requests come in clusters, not sporadically.

4. Context Is Too Small (Below Cache Threshold)

OpenAI only caches chunks starting at 1,024 tokens, in 128-token increments. If your context is tiny, like 20–30 lines of text, it won’t meet the minimum size required to activate caching.

Good candidates: 10,000-word documentsBad candidates: 100-word descriptions

Caching is designed for large prompts, not small ones.

5. Extremely High Request Rates for the Same Prefix

This one is subtle but important.

OpenAI routes your requests to specific servers based on a hash of the first ~256 tokens ("the prefix"). If you send more than ~15 requests per minute with the same prefix, some will overflow to other machines where the cache isn't stored.

Those overflow requests will behave like cold starts.

Where this happens:

• Burst traffic from consumer apps
• Batch-processing pipelines
• Multi-tenant SaaS systems hitting the same prompt prefix

Solution: Distribute the requests over time or use slightly varied prefixes.

Conclusion

Prompt caching might be one of the simplest optimizations you can apply to an AI-powered system, yet it delivers some of the biggest wins. Without changing your architecture or rewriting your prompts, you can significantly reduce how much your application spends on repeated context, and speed up every request at the same time.

The real advantage lies in how naturally it fits into existing workflows. If your app relies on large, consistent blocks of context, like product docs, policies, codebases, or RAG-retrieved chunks, caching works quietly in the background to cut costs, lower latency, and make your system feel more responsive.

As you design or scale your AI applications, keep these principles in mind:

• Caching is most effective when context is large and reused
• It can reduce costs by 50–75% with no extra engineering
• It improves response times by up to 80%
• OpenAI handles it automatically; Claude gives you explicit control
• Cache lifetimes are short, so steady request volume helps maximize benefits

Whether you're building a customer support bot, code review assistant, internal knowledge tool, or a RAG-based system, prompt caching gives you a practical way to run faster and cheaper, without sacrificing accuracy or user experience.