What Is a Chatbot—And How Do They Work?

Imagine having a conversation with a computer that feels just like chatting with a customer service agent. That's the magic of chatbots — software designed to simulate human interaction, whether you're typing or talking. As AI continues to advance, chatbots are increasingly becoming integral to both customer experiences and business operations.

Our research reveals that 58% of customers now use chatbots for simple customer service tasks — up from 43% in 2020. To tap into the potential of this technology, let's explore the world of chatbots, their impact on customer service, and practical steps to integrate them into your business.

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 are chatbots used for
2. Types of chatbots
3. What are the benefits of chatbots?
4. How do chatbots work?
5. AI and chatbots
6. How to create a chatbot
7. The future of chatbots
8. How to choose the best customer service chatbot software

Customers often use chatbots for quick answers to questions about products or services or for help with simple tasks such as booking appointments or tracking orders. Customer service teams can also use chatbots to handle routine enquiries, allowing them to focus on more complex customer needs. This helps deflect cases, reduce agent burnout, streamline processes, and improve customer service metrics such as customer satisfaction score (CSAT).

Chatbots come in different varieties, depending on their purpose and complexity. Here's a look at the most common types:

• Rules-based chatbots follow predefined rules to respond to common issues. They're ideal for answering FAQs or performing basic tasks. Example: a chatbot that helps you find store hours or basic product information.
• AI-powered chatbots use AI to understand and respond to more complex queries. They leverage customer data and learn from interactions over time, enhancing their ability to handle diverse conversations. For example, virtual assistants like Siri or Alexa. (We'll dive deeper into AI-powered chatbots later in this article.)
• Hybrid chatbots combine rules-based and AI-powered approaches. They handle straightforward tasks with rules and use AI for more complex interactions. Example: customer service bots that escalate complicated issues to human agents.
• Voice-activated chatbots respond to spoken commands using voice recognition technology. They're commonly found in smart devices. For example, the Siri bot used in Apple-brand smartphones.
• Contextual chatbots use machine learning (ML) and natural language processing (NLP) to understand the context of a conversation. They remember your past interactions to provide more accurate responses. Example: ecommerce bots that suggest products based on previous purchases.

Businesses of all sizes use chatbots to boost agent productivity and efficiency. Key advantages of using chatbots:

• Always available: Chatbots are on-call 24/7, so customers can get help anytime, day or night, whenever is convenient for them. This means no waiting for office hours to get questions answered.
• Improved productivity: With a chatbot, you can optimise an agent's time for more complex issues and higher value interactions by reducing the volume of customer requests. And when a customer needs to transfer from chatbot to human, the bot can collect and analyse important case information to route it to the right agent.
• Fast responses: Chatbots give instant answers, cutting down on wait times and improving efficiency. In today's fast-paced world, customers appreciate quick and accurate responses.
• Personalised service: Advanced AI chatbots leverage past interactions, purchase history, and marketing and web engagement data to tailor each conversation, making interactions feel more personal. This enhanced personalisation helps build stronger relationships with customers.
• Scale: A chatbot can talk to multiple people at once, making it easy to handle busy times without dropping the ball. This is great for peak hours and seasons when lots of customers need help.
• Consistent answers: Chatbots provide the same information to everyone, ensuring all customers get the same level of support. This consistency helps maintain high service standards.
• Data collection: A chatbot can gather information from customer interactions, offering insights into customer behaviour and common issues. This data is valuable for improving products and services and identifying contact reasons to automate.

Chatbots operate in one of two ways: through simple rules or more advanced AI, managing interactions through structured dialogues designed to accomplish specific communication tasks.

Rules-based chatbots function by identifying key words or phrases from user queries and matching these to predefined responses. For example, if you ask a rules-based chatbot, "What are your store hours?", it detects the keyword "hours" and retrieves information about operating times. These chatbots engage in a basic form of dialogue, following a linear script where the conversation flows strictly according to predefined rules. This method can be limited, as it struggles with variations in how questions are phrased.

AI-powered chatbots use NLP and ML to go beyond simple keyword recognition and can understand the underlying intent behind a user's message. This allows them to engage in more complex dialogues that are personalised and adapt based on the context of the interaction and previous exchanges. These chatbots learn and evolve from each interaction, enhancing their ability to conduct seamless, end-to-end conversations that closely mimic human interaction. This makes them sophisticated virtual assistants, capable of managing detailed and nuanced dialogues with users.

Chatbots have come a long way from their humble beginnings as basic script-based programs. Today, AI-powered chatbots can understand and process human language with remarkable accuracy. These advanced chatbots are no longer limited by an inability to understand context or the subtleties of human conversation. They're more engaging and effective at meeting the needs of today's digital customers.

AI chatbots are a big step up from traditional chatbots. They use advanced technologies such as NLP and ML to understand and respond to user inputs in a more human-like manner. AI chatbots can understand and interpret the context and intent behind customer queries, which allows for more dynamic and conversational interactions. They can also learn from experience.

AI chatbots can maintain conversational context and adapt their responses to the user's needs. They're great for customer service settings, where it's important to understand and respond appropriately to a customer's mood and needs.

Chatbot systems have become much more sophisticated, thanks to significant advances in customer service AI. In fact, 83% of service leaders expect to increase investment in AI over the next year.

AI chatbots are programmed to have conversations using natural language processing or natural language understanding (NLU). This helps the chatbot better understand the nuances of human speech and talk-to-text. These technologies also make it possible to get at the intent behind what is being said and to respond more intelligently and authentically.

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 rules and rigid dialogues and provide a response based on existing data. This allows visitors to lead the conversation and have the bot follow.

By harnessing enormous amounts of data and low-cost processing power, AI and machine learning help dramatically boost the chatbots' comprehension and decision-making.

When chatbots connect to technologies such as NLU, they can:

• Keep up with the context of the conversation to ensure a smooth and coherent interaction.
• Manage unique dialogue and adapt responses based on the specific needs and styles of each conversation.
• Adjust the behaviour of your virtual agent as the conversation evolves, tailoring it to the customer’s needs.
• Take decisive actions to solve customer issues, improve self-service capabilities, and help prevent cases from reaching agents.

An AI-powered bot can also be trained to learn from any customer interaction. Yes, that's right — they're 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 organisations 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 coming up with the appropriate response.

AI-powered chatbots are a powerful way to enhance the customer experience. Whether you're working in a call centre or a contact centre, our State of the Connected Customer report shows that customers increasingly expect quick, personalised, and efficient service — and AI chatbots can help deliver on all those fronts by:

• Reducing customer wait time: Chatbots answer common questions instantly, eliminating the need for customers to wait for an email or phone response. This helps meet the expectations of the 80% of customers who believe that the experience a company provides is just as important as its products and services.
• Resolving support cases quickly: Chatbots handle straightforward enquiries, helping customers resolve issues on their own and freeing up human agents to focus on more complex cases. This efficiency is appreciated by the 47% of customers who are willing to pay extra for better customer service.
• Providing relevant and accurate resources: Chatbots greet customers with personalised messages and direct them to useful information efficiently, which improves overall satisfaction.