What Is a Chatbot (and How Do They Work)?

Have you shopped online and had a pop-up ask if you needed assistance? You very likely were visited by a chatbot aiming to help you with your purchase. Before we dig into how chatbots are now a key part of customer service, let’s first answer the question: What is a chatbot?

A chatbot (coined from the term “chat robot”) is a computer program that simulates human conversation either by voice or text communication, and is designed to help solve a problem. Organisations use chatbots to engage with customers alongside the classic customer service channels like phone, email, and social media.

Chatbot popularity is on the rise. We’ve found that 58% of customers have used chatbots for simple customer service — up from 43% in 2020.

In the workplace, businesses use chatbots to boost agent productivity and efficiency in a range of ways. Chatbots provide service teams the information they need quickly, serving up relevant resources even as the customer conversation changes. Chatbots also speed up self-service options for customers and resolve common issues such as checking claims status, modifying orders, and answering billing questions.

In this article, we’ll learn about chatbots, explore their impact on customer service, and discuss how leaders can take advantage of this technology.

1. What is a chatbot?
2. How do chatbots work?
3. What is an AI chatbot?
4. How are AI chatbots and automation used in business?
5. Are AI-powered chatbots important for customer experience?
6. What are examples of chatbots?
7. What’s next for chatbots?

As we mentioned, a chatbot (or the affectionately coined chatterbot) is a computer program that digitally engages with customers and visitors either by voice or text communication to help find a resolution or solve an issue.

Chatbots can be customised and used in a variety of ways. Most of us as consumers are familiar with bots for customer service. They’re also used with popular chat and messaging platforms like SMS, Facebook Messenger, WhatsApp, and WeChat.

With chatbots, people can have a conversation or interact with a software program that helps them find answers quickly. Most importantly, a chatbot can influence a customer relationship by responding to requests faster while meeting customer expectations.

With the potential for delivering instant responses around the clock, chatbots free up customer support teams to apply their emotional intelligence and time to more complex issues.

One of the earliest examples of a chatbot was a program called ELIZA, built by Massachusetts Institute of Technology professor Joseph Weizenbaum in the mid-1960s to simulate a psychotherapist. Using keywords and pattern matching, ELIZA responded to a user’s typed questions with simple open-ended replies, based on a script.

Over the years, developers have incorporated more sophisticated techniques to enable chatbots to better understand questions and provide more useful responses.

While today’s bots still can’t handle all customer queries, they can respond to frequently asked questions or perform straightforward tasks. The simplest form of a chatbot system parses customer input, then scans its database for articles related to certain words and phrases. In short, it operates like a document-retrieval system based on keywords.

Chatbots follow the rules that they were given. Rules-based chatbot software executes pre-programmed actions based on configuration by the developer.

Rules-based chatbot technology acts based on click actions, like a customer answering “yes” or “no,” or by recognising a particular keyword or group of keywords. For example, a cosmetics company might create a bot that questions users about their makeup preferences, then recommends products and offers that match their responses. In these cases, the computer program behind the chatbot sticks to a strict set of predefined rules and has little ability to recognise the way people naturally speak.

Think about the times you may have typed a question into a website’s dialogue box and received an answer that didn’t make sense. That’s likely because the chatbot program recognised keywords in your request, but not the context in which they were used. That’s where artificial intelligence chatbots come in.

Chatbot systems have become much more sophisticated, thanks to significant advances in the field of AI. In fact, the share of service decision makers who report using AI has increased by 88% since 2020.

AI chatbots are programmed to have human-like conversations using natural language processing (NLP) or natural language understanding (NLU). In particular, developers are using NLP to build bots that can better understand human speech and talk-to-text. These technologies also make it possible to better understand the intent behind what is being said and to respond more intelligently.

With generative AI, the chatbot can interpret the context as it is written, which enables it to operate more or less on its own. In other words, AI chatbot software can understand language outside of pre-programmed commands and provide a response based on existing data. This allows visitors to lead the conversation, and the bot to follow.

By harnessing enormous amounts of data and low-cost processing power, AI and related technologies such as machine learning help to dramatically improve the chatbots’ quality of understanding and decision-making.

When chatbots connect to technologies such as NLU, they can learn more complex ways of simulating human conversation, such as:

• maintaining the context of the conversation,
• managing a unique dialogue,
• and adjusting responses based on the changing needs of the customer.

An AI-powered bot can also be trained to actively learn from any interaction with a customer to improve performance. Yes, that’s right, they are programmed to get better.

For example, such systems can be trained to recognise customer frustration and escalate problems to the company’s support centre. No wonder 84% of IT leaders believe AI will help their organisation better serve customers.

Of course, a chatbot doesn’t need AI-powered features to be a useful support channel. The advantage is, however, that the more the customer interacts with the bot, the better its recognition system becomes at predicting the appropriate response.

As mentioned, chatbots save time for both customers and agents. About 88% of agents say that automating routine tasks allows them to focus on new projects.

AI chatbots can be custom-built to meet a range of specific needs in both business-to-consumer (B2C) and business-to-business (B2B) environments. Here are the most widely used business cases:

• Call-centre support: By interacting with a support AI chatbot, customers can help themselves without speaking to an agent. They complete tasks such as changing a password, requesting an account balance, or scheduling an appointment.
• Enterprise integration: Chatbots can integrate with back-end systems, such as inventory management or customer relationship management (CRM). AI bots help sales reps quickly access phone numbers, or human resource teams perform faster employee onboarding.
• Virtual personal assistants: Chatbots help consumers navigate their daily lives and expedite activities such as ordering groceries or booking a vacation online. Apps such as Siri, Alexa, or Google Home, all deploy chatbots to play the part of virtual assistant.

Automation, including the implementation of AI-powered chatbots, also helps service teams with increasing customer demands. Repetitive, manual tasks slow agent productivity and frustrate customers.

Automating communication workflows can be the key to doing more with less — leading to empowered agents, happier customers, and cost and efficiency savings.

Automation with chatbots speeds things up. The majority of service professionals describe the following activities as mostly automated:

• Basic information gathering
• Case classification and routing
• Recommendation of next-best actions
• Transcription of customer interactions
• Soliciting customer feedback

In the examples above, AI is used to augment human skills, rather than replace them. Empathy still matters. For the toughest problems, customers prefer to speak with an agent.

“Companies are not going to abandon human agents in favour of chatbots,” said Sheila McGee-Smith, founder and principal analyst at McGee-Smith Analytics. “But they are going to continue to deploy them for simple interactions and work to make it easy for consumers to reach out to a human agent when required.”

The short answer is yes. Whether you’re working with a contact centre vs. call centre, chatbots can help improve your customer service. Digital disruption is raising customer expectations. Consumers and business buyers are more informed and less loyal than their predecessors. They’re looking for personalised experiences based on trust and understanding, and they will shop around to find them.

Out of 14,300 customers asked in the State of the Connected Customer survey, 80% agree that the experience a company provides is just as important as its products and services, and 47% are willing to pay extra for better customer service. The standard for quality, efficient experiences is higher than ever.

Chatbots also reduce costs by enabling self-service in simple scenarios, delivering relevant information faster, and improving the customer experience.

That’s where AI-powered chatbots come in. While chatbots can’t replace humans, they help speed up the customer support experience by answering easy questions. They also collect important information that agents need to solve a case quickly.

More specifically, AI chatbots help companies deliver good customer service in the following ways:

• Reduce customer wait time: Chatbots reduce the time customers spend waiting in line. Common questions are answered instantly in a chat window instead of waiting for an email, phone call, or other response.
• Resolve support cases: Chatbots act as a company’s ally in the race to quickly resolve support cases. They can answer straightforward questions for customers to make them happier, and they can do this over and over again. Consequently, fewer cases get logged for support agents to resolve.
• Provide relevant resources: Chatbots can instantly welcome customers with a customised greeting and efficiently direct them to helpful resources.
• Identify business leads: AI-powered chatbots help open conversations for service agents by handling initial support interactions with a customer or prospect. For example, a chatbot might gather an email address, delivering a more qualified lead to a sales rep, which can then be used to personalise future customer interactions.

A popular tactic for relieving agents of high-volume, low-complexity cases is deflection, or how fast automated resources can satisfy customer demand.

AI chatbots offer enormous potential when it comes to scaling personalised experiences. Personalisation becomes even better as they get to know customers and use AI to predict their next action. For example, a customer wants to purchase a pair of shoes. The chatbot can personalise the conversation by adding their name throughout the chat and suggesting complementary accessories to go with their shoe style choice.

Customer service leaders use chatbots with customers and within their own organisations. Here are a few examples of successful chatbots.

• Peloton’s chatbot analyses customer issues and connects them to support from relevant teams to resolve tickets quickly with higher customer satisfaction.
• Capital One’s chatbot Eno (“one” spelled backward) communicates with a bank for a customer via text message to help them carry out transactions. And there are some successful chatbots blazing the trail across many different industries.

Chatbots are transforming the way businesses engage with customers, manage lead generation campaigns, and automate payments. Love them or hate them, chatbots are here to stay and are evolving by the minute. So what’s next for chatbots? We pulled these hot chatbot trends to follow for the future:

• AI and chatbot technology will continue to evolve and usher in new talk-to-text user experiences.
• High-performing service teams will develop AI chatbots to augment human agents and deliver advanced 24/7 customer service support.
• Omnichannel support will reign, with advanced AI-powered chatbots leading the way.
• Consumers will purchase more products and services with automated payments via chatbot.

And these are just a few! In an age where the speed of service matters more than ever, chatbots help companies stay a step ahead.