Late Chunking vs Contextual Retrieval: Encode-First Zero-Cost Context vs LLM-Prefix Precision and Cost
Anthropic Contextual Retrieval uses an LLM to prefix each chunk with 50-100 tokens, cutting failure rate from 5.7% to 1.9% with rerank at ~$1.02/1M tokens; Late Chunking encodes the full 32K-window document first then mean-pools by chunk boundaries for zero extra LLM cost — the trade-off is window, latency, and update shape.