OpenAI is a non-profit artificial intelligence research company founded with the mission to develop and direct AI for the betterment of humanity. Unlike profit-driven entities, OpenAI’s research is free from financial obligations, allowing a singular focus on positive human impact.
Pioneering AI for Humanity’s Benefit
Since its inception in 2015, OpenAI has raised over $11 billion in funding and has been at the forefront of AI innovation, with products like ChatGPT and DALL-E making waves. ChatGPT, an AI chatbot, simulates human conversation and offers a subscription-based service, ChatGPT Plus, with access to advanced features like DALL-E 3 for image generation and real-time web browsing via Bing integration. Codex simplifies coding by leveraging AI to understand and generate code in various programming languages.
OpenAI has also significantly contributed to the advancement of large-scale language models (LLMs), particularly the GPT series, enhancing natural language processing capabilities. The company has also been a vocal advocate for ethical AI, emphasizing responsible development and deployment. Furthermore, OpenAI is actively engaged in AI safety and alignment research, ensuring AI systems align with human values and goals. Their involvement in AI governance discussions underscores a commitment to safe and beneficial AI use.
Industry Overview: AI in the Spotlight
The Artificial Intelligence (AI) industry has grown considerably both in terms of the number of AI-related companies but also recognition and use by mainstream users. The industry includes tech giants like Google, Microsoft, Amazon, and Facebook, along with a swarm of ambitious startups and research institutions.
Despite being a relatively newer industry, AI has accelerated in growth over the last several years, especially as the technology has become more mature and companies in other industries such as tech and finance have adopted and embraced it to gain a competitive advantage. And, now, there are currently more than 70,000 AI companies worldwide, and worldwide spending on AI systems was estimated to be approximately $154 billion across all industries in 2023.
Both companies big and small are actively working to bring AI to the market. In 2023 alone, AI startups raised $42.5 billion across 2,500 equity rounds, exhibiting the amount of resources invested into AI products and the rapid expansion of AI into the market. Larger companies with ample resources are developing AI technologies in-house with teams of data scientists and engineers brought together to work on projects for specific needs. Larger companies are also acquiring AI startups and smaller companies with AI expertise to gain access to AI technology and talent.
In general, the power of processing for AI has advanced over time, playing a crucial role in enabling LLMs to work effectively. With the development of more powerful hardware as well as improvements in algorithms and software optimizations, AI models have become more efficient and successful with the ability to process vast amounts of text data with unprecedented accuracy and speed.
The rapid integration of AI into products and services has allowed more users to grow comfortable with it. Now, AI is not only readily available but is simple enough that people can access and use it without fear. The low barrier to entry has helped increase the accessibility and adoption of AI by mainstream users over time.
As a result of its explosive growth and popularity, the competition in the AI industry is fierce with different applications and adoption by customers. Other than OpenAI, Google DeepMind and their Gemini Models, focus on building general-purpose learning algorithms. With Amazon as their major investor, Anthropic is another heavyweight, specializing in AI safety and research. They have raised more than $7 billion from investors, valuing Anthropic at up to $18.4 billion. They’re hot on OpenAI’s heels, boasting a funding level second only to Google. Cohere is a rising star, focusing on building language models for companies. Stability A.I. is also in the ring, known for being the world’s leading open-source generative AI company.
Then there are the tech titans. Microsoft is no slouch either, investing heavily in AI with initiatives like Azure AI and Cortana, and developing a range of AI products and services. Facebook wields AI in its products and services, from facial recognition to content moderation, through its product Meta AI. Amazon, with its AWS and robotics ventures, is a significant force in AI. IBM, famous for Watson, is a key player in healthcare and business analytics AI. Because of the ability to develop faster and the large amount of investment put into the industry from companies across the globe, the AI industry is constantly changing and growing.
The Pricing Strategy: Pricing Plans That Speak Your Language
Target Consumer Audience:
OpenAI has three different core customer segments that they focus on. The first is the mainstream, who learn and use OpenAI products without much barrier to entry. It was immediately evident when OpenAI first launched just how quickly they were able to get mainstream adoption. For instance, just five days after it was launched and made public in November 2022, ChatGPT reached 1 million users. By comparison, Instagram took 2.5 months to reach 1 million users. And, it grew rapidly, reaching 100 million monthly active users in January 2023, making it one of the fastest growing applications in history.
Businesses make up another core segment for OpenAI. With the ways that companies can leverage AI to increase productivity and reduce costs, OpenAI has worked with businesses seeking to revolutionize their industries. Some businesses partner with OpenAI to experiment while others hope to operationalize their processes. Either way, many businesses with a vision for the future turn towards OpenAI to innovate and find new solutions.
Finally, developers are the third core customer segment that OpenAI targets. Developers are constantly working with OpenAI to harness the technology and platform in order to build out a broader ecosystem and bring their ideas to life.
Current Pricing Plan:
When it comes to pricing, OpenAI believes in keeping things transparent, so you know exactly what you’re getting. Whether you’re diving into the depths of language models or painting with pixels in image models, OpenAI is pretty flexible and tries to offer a plan that fits your needs.
For instance, as an evolving technology, they offer different versions with some more powerful than others (e.g. ChatGPT-3.5 vs. 4). So, access to the newest versions and features will offer users more potential value and faster iteration
The Pricing Metric:
For these language models, the pricing metric they are using here is tokens and number of users. A token here refers to a unit of text that the model processes at a time, where each token typically represents a word or a subword with the model processing a sequence of tokens to understand and generate text. So, looking at the pricing for their original GPT-4 model which can understand more complex instructions, it is currently $5.00/1M tokens for inputs and $15.00/1M tokens for outputs. By comparison, the GPT-3.5 Turbo model is the fast and inexpensive offering for simpler tasks, where it is currently priced at $0.50/1M tokens for inputs and $1.50/1M tokens for outputs.
For the artists and visual thinkers, DALL·E 3 has its own pricing model based on image quantity, quality, and resolution. So, at a 1024×1024 resolution, DALL·E 3 offers two options: Standard quality at $0.040 per image and HD quality at $0.080 per image. For resolutions of 1024×1792 and 1792×1024, the pricing rises as Standard quality is priced at $0.080 per image and HD quality is priced at $0.120 / image.
Pricing for Different Customer Types:
Finally, ChatGPT offers a range of options for different types of customers. The Free plan is perfect for beginners, while the Plus plan, at $20 per user billed monthly, is for those looking to boost their productivity. Teams can opt for the Team plan, starting at $25 per user billed annually or $30 per user billed monthly, for supercharged collaboration. And for the big players, there’s the Enterprise plan, tailor-made for innovative companies looking to scale securely.
How Their Pricing Has Evolved:
OpenAI’s pricing journey has been a tale of adaptation and innovation, driven by a commitment to meet the evolving needs of its users. From early access programs to tiered pricing structures, OpenAI has continuously refined its approach to pricing to provide greater flexibility and value to its customers.
In its early days, OpenAI offered select partners and researchers early access to its language models, such as GPT-2 and GPT-3. This allowed the company to gather valuable feedback and insights, enabling them to improve the models before their wider release. Then, with the launch of the GPT-3 API, OpenAI introduced a usage-based pricing model, where customers pay based on the number of tokens processed by the model. This model offered flexibility and scalability, allowing users to pay only for what they use. Recognizing the diverse needs of its users, OpenAI later introduced tiered pricing for its API. This approach offered different pricing plans based on the level of access and usage requirements, allowing users to choose a plan that best suited their needs and budget.
Initially, OpenAI restricted the use of its models for commercial purposes. However, in response to user feedback and demand, the company later introduced a commercial use plan, allowing businesses to use the models for a wide range of applications. Pricing for these custom models is based on the complexity and scope of the project, ensuring that users receive a tailored solution that meets their unique requirements.
Furthermore, the rapid rise of competitors, especially those backed by big tech companies such as Google and Amazon, has led to increased competitive pressure on OpenAI. For instance, many of OpenAI’s competitors also price based on usage metrics, and some (such as Google Cloud AI and AWS) even offer volume discounts for high-volume usage. However, in spite of the rise of alternative offerings, OpenAI has not adapted much, if at all, as its pricing has not changed much over the same period of time in which these competitors have emerged. This is likely due to its widespread popularity and public recognition as a premium provider of AI services, giving it an advantageous position within the market.
When taking a closer look at OpenAI’s pricing changes over time, we can observe the key differences in their pricing models over a one year time span, between February of 2023 to March of 2024. For instance, back in February of 2023, their language model offerings were completely different from those offered currently, as they only offered their base models Ada, Babbage, Curie, and Davinci.
And, while the pricing was still centered around tokens, OpenAI offered price points for every 1K tokens. Furthermore, they introduced and enticed new users to the service through a “Start for Free” offering that they no longer include now, which entailed giving new users $18 in free credit to be used in the first 3 months to experiment with. Also, as the technology was pretty new, OpenAI made sure to enforce usage quotas with their rollouts, where new users would have an initial spend limit that could increase over time based on a user’s track record.
By March of 2024 the next year, OpenAI offered multiple language models with varied capabilities, also allowing users to view pricing in units of either per 1M or 1K tokens. Shifting to “input” versus “output” pricing (as opposed to “prompt” and “completion”), the new pricing model also includes a “Vision pricing calculator” that allows users to view how pricing varies for different resolutions. Finally, with a more established consumer base by March of 2024, OpenAI outright eliminated the initial offering of “starting for free”, which had evolved from offering $18 in free credit to $5 to none. Ultimately, many of the pricing changes evolved as the technology evolved and as the consumer base grew in size, catering to the growing complexity of the models themselves as well as the popularity of the services.
Pricing Strategy Breakdown: Key Takeaways
Why is their pricing strategy effective?
- Accessibility: OpenAI offers a range of pricing tiers, from free to enterprise-level plans, making its technology accessible to a wide audience, from individual developers to large organizations.
- Scalability: The pricing model scales with usage, allowing users to start small and increase their usage as their needs grow, without needing to renegotiate terms or switch providers.
- Flexibility: OpenAI’s pricing allows users to choose the level of access and support that best suits their needs, from self-serve options to more hands-on support for enterprise customers.
- Transparency: OpenAI’s pricing is transparent and easy to understand, with clear pricing tiers and usage limits, which helps users budget effectively and avoid unexpected costs.
- Value-based: The pricing is aligned with the value that users derive from the technology, which is particularly important for users who are looking to use AI to drive business outcomes.
What makes their pricing strategy different from others?
- Focus on Usage: OpenAI’s pricing is often based on usage metrics, such as the number of API requests or compute resources consumed, rather than a flat fee. This allows users to pay for what they use, which can be more cost-effective and flexible, especially for users with varying or unpredictable usage patterns.
- Tiered Pricing: OpenAI offers tiered pricing with different levels of access and support, allowing users to choose the tier that best fits their needs and budget. This tiered approach is more flexible than a one-size-fits-all pricing model and can accommodate a wider range of users.
- API-first Approach: OpenAI’s pricing is designed with an API-first approach, catering to developers and businesses looking to integrate AI capabilities into their applications. This approach is more developer-friendly and aligns with modern software development practices.
- Value-based Pricing: OpenAI’s pricing is based on the value that users derive from the technology, rather than just the cost of providing the service. This value-based approach allows OpenAI to capture more of the value it creates for users, which can lead to more sustainable pricing over the long term.
How did they do it? Constant engagement and creating relationships with consumers
- Clear Message: OpenAI was transparent about its pricing, clearly outlining the different pricing tiers and usage limits on its website. This transparency helped build trust with potential customers and set clear expectations about the cost of using OpenAI’s services.
- Developer Outreach: OpenAI actively engaged with the developer community through events, conferences, and online forums to promote its pricing strategy and solicit feedback. This outreach helped OpenAI understand the needs of its target audience and tailor its pricing strategy accordingly.
- Case Studies and Testimonials: OpenAI showcased case studies and testimonials from satisfied customers to demonstrate the value of its services and the effectiveness of its pricing strategy. This social proof helped build credibility and attract new customers.
- Partnerships and Integrations: OpenAI partnered with other companies and integrated its services into popular platforms and tools to expand its reach and make its pricing strategy more accessible to a wider audience.
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