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What is a chatbot?

A chatbot is an AI-powered software application that engages in human conversation in a natural way.
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Chatbots: Helping people converse with technology

Chatbots understand natural human language, simulate human conversation, and run simple, automated tasks. They rely on artificial intelligence (AI) and natural language processing (NLP) to help people effectively interact with web services and apps.

Why use chatbots?

Improvements in AI, machine learning, data science, and NLP have made it easier for companies to build conversational bots for a variety of purposes. Engaging with users through text, graphics, or speech, chatbots operate through multiple channels, such as messaging apps, mobile apps, websites, phone lines, and voice-enabled apps. They can be developed to handle just a few simple commands or to serve as complex digital assistants and interactive agents. A single chatbot can be a part of a larger application or be completely stand-alone.

Given their versatility and the ease which they can be built, chatbots have proliferated. Here a some of the ways that chatbots are used to benefit companies, their customers, and their employees.

How companies use chatbots

Chatbots provide several benefits for companies. Many companies have chatbots that act as virtual agents that can handle customer service issues and support employees. In general, improved customer service combined with a reduction in customer service costs leads to a high return on investment (ROI) for companies that use chatbots for customer service.

Using chatbots also helps companies speed up their sales cycles, generate more leads, and improve customer loyalty. Companies use AI chatbots to build personalized user experiences that lead to happier, more engaged customers and higher conversion rates.

In addition to the high ROI, chatbots are also becoming commonplace simply because they are a simple, convenient service that consumers and employees have come to expect and rely on. As organizations invest in more complicated technologies and build out multiple messaging interfaces, chatbots are quickly becoming a necessary bridge between customers and employees, and the massive amounts of information, systems, and applications that they interact with.

How customers use chatbots

Customers also benefit from the use of chatbots. Chatbots provide customers access to assistance or customer service that is available on demand without restriction. When customers interact with chatbots, they can get replies to their questions anytime. They also tend to have easier sales experiences and have a more personal connection with the brands that they interact with.

How employees use chatbots

Chatbots in the workplace can also benefit the employees who work there. Chatbots can be used to automate simple tasks, which frees up employee time. They can also be used within organizations to help employees navigate company policies, procedures, HR information, and other internal systems and documentation.

What is natural language processing?

To work effectively, chatbots must be able translate human speech and language into something that a computer can understand. The process of understanding, analyzing, and responding to human speech is a complex task, which we call natural language processing.

Natural language processing refers to the entire end-to-end process of how chatbots use artificial intelligence to make sense of large amounts of natural language data. NLP works by taking a text or voice input from a human, using AI to determine that input’s meaning, and then generating and delivering an appropriate response. NLP makes it possible for bots to communicate with human users in a way that emulates human conversation.

Natural language processing works by breaking down user inputs into utterances, intents, and entries. An utterance is any phrase that a user enters into a chatbot. When an utterance is entered into a chatbot, the chatbot determines the intent of the utterance—the user’s goal in contacting the chatbot. Finally, the chatbot recognizes entities within the utterance that help define the details of the intent. Entities are typically things like dates, times, places, names, or locations that provide further specificity to a user’s intent.

How do chatbots work?

A chatbot is any app that users interact with in a conversational way, using text, graphics, or speech. There are many different types of chatbots, but all of them operate much the same way:

Step one: A user enters a message into a chatbot via a channel such as an app, website, or text message or even by speaking on a phone call. This message can be a command or a question.

Step two: The chatbot receives the content of the message and captures related info such as the channel the message came in through. The chatbot then uses NLP to determine the purpose of the message and identify relevant intents.

Step three: The chatbot determines an appropriate response and returns the response to the user via the same channel. This process continues following steps one through three as the conversation continues. The conversation continues until a user’s question has been answered, their problem has been solved, or until the request is transferred to a live agent.

What types of chatbots are there?

There are two main types of chatbots that businesses use: transactional chatbots and conversational chatbots. Their primary difference lies in their overall levels of complexity.

Transactional chatbots

A transactional chatbot, also called a task-oriented or declarative chatbot, is a single-purpose chatbot that’s focused on performing or automating one task or function. It’s designed to provide a fixed set of options for a user to choose from, depending on what the user wants to do or what problem they want to solve. After the user makes their choice, the chatbot guides them through the process by continuing to provide available options until the user’s question has been answered or the problem has been solved, or until the user is transferred to a live agent.

Transactional chatbots use natural language processing to understand the intent of the user’s inquiry and generate automated responses that are designed to be conversational. Interactions with transactional chatbots are trained on structured data, which makes them helpful for businesses that know in advance what common actions or problems that customers may need help with. For example, restaurants, delivery companies, and banks use transactional chatbots to handle common questions, such as questions about business hours, or to help customers with simple transactions. There’s a wide range of transactional chatbot examples, because transactional chatbots are the most commonly used type.

Conversational chatbots

A conversational chatbot is a more sophisticated and interactive type of chatbot that uses natural language processing to deliver more personalized interactions. These conversational bots use conversational AI, natural language processing, and access to knowledge databases and other information to detect nuances in a user’s questions and responses, and give dynamic, relevant answers the same way a human would.

Conversational chatbots, which are often called virtual assistants or digital assistants, also use predictive intelligence and analytics for personalization based on each user’s profile and previous behavior. Over time, this type of chatbot can learn a user’s preferences and use this learning to provide recommendations and anticipate needs. Conversational chatbots are used by e-commerce companies, online services, social platforms, businesses with advanced software as a service (SaaS) tools, and business-to-business (B2B) companies that provide enterprise solutions.

How are chatbots used?

Chatbots are commonly used for many different purposes. Here are a few examples of how chatbots are being used every day within companies and across industries.

Chatbot applications by function

Companies often use chatbots in the following business functions:

Customer service: Chatbots can be used to create virtual customer service agents that are always available, which increases customer satisfaction. Chatbots can also be used to file and acknowledge help desk requests or perform routine tasks for customers.

Human resources: Chatbots can assist with HR tasks like helping employees file for paid time off or sick leave, notifying employees of policy changes, and helping employees understand and manage their benefits.

Finance and accounting: Chatbot applications can assist employees with filing expense reports, opening purchase order requests, and updating and keeping track of vendor details.

Marketing: Chatbots are used to send targeted offers to loyal customers, track customer satisfaction, and build personalized experiences that keep customers engaged.

Sales: Chatbots can prequalify leads, provide quotes to potential customers, and start a proactive conversation, which frees up time for salespeople to focus on closing sales. 

Chatbot applications by industry

Companies in every industry benefit from using chatbots for many purposes. Here are just a few examples:

E-commerce and retail: Online stores use chatbots as customer service agents to provide product information, offer personalized product recommendations, and process orders and return requests.

Financial services: Banks and credit unions use chatbots as intelligent agents that can answer customers’ questions, provide account balances and statements, handle basic transactions, and give advice on saving and investing.

Healthcare: Hospitals and clinics use chatbots for purposes such as scheduling appointments, providing medication information, and helping patients find the nearest office locations.

Education: Chatbots are used for student feedback, teacher assessment, and administrative assistance.

Insurance: Chatbots serve as virtual agents and advisors that file claims, provide status updates, and perform other basic tasks, freeing up humans to perform more advanced tasks.

Manufacturing: Chatbots help manufacturers with vendor management and engagement, crew assistance, workplace maintenance, product recalls, and human resources tasks.

Travel and hospitality: Airlines and hospitality companies use chatbots as interactive agents that help customers with ticketing, online check-ins, and other travel arrangements.
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Frequently asked questions

  • Chatbots are used to automate interactions with users, providing customer support, answering questions, and handling routine tasks in various industries like retail, healthcare, and banking.
  • There are two main types of chatbots: transactional and conversational.
    · Transactional chatbots automate single tasks, providing fixed options that guide users through processes such as making reservations or checking account balances.
    · Conversational chatbots use natural language processing (NLP) to engage in personalized interactions with users, handling nuanced queries and learning user preferences over time. 
  • Chatbots offer all-day support, providing users with instant responses and simultaneously handling many requests. They reduce the workload of human agents, allowing them to focus on more complex tasks.
  • Chatbots can interact with users through text, graphics, and speech. A user sends a message through a channel such as an app or website, and the chatbot captures and processes it using NLP. The bot identifies the user's intent, formulates an appropriate response, and replies through the same channel. This cycle repeats until the user's query is resolved or the user is transferred to a live agent.
  • To create a chatbot, first define its purpose and gather relevant data. Then use a low-code and no-code development platform like Microsoft Copilot Studio to design and program the bot, training it with sample conversations. Implement NLP for understanding user input and test the bot thoroughly. Finally, deploy it across your desired platforms and continue to monitor and update it based on user interactions.