What are AI Chatbots and How Do They Work

This article is entirely written according to the mission and values of “AI Chatbot Institute” Foundation to ensure that artificial intelligence (AI) is good for and benefits humanity and the planet.

If you use the internet or a smartphone daily, there is a great chance that you have heard about a chatbot at least a few times in your life. Actually, we often use a form of chatbot without considering it. The phone line pre-recorded messages used by telecoms, banks, etc., are a type of chatbot. So, this tech appears to be a part of our daily lives without even knowing it.

But there is a twist. Despite the huge benefits that they offer to us (some of them we will look at closely later in the article, especially at the benefits granted by the powerful new conversational AI chatbots), the chatbots until a few years ago had a slightly bad reputation. This was caused by the limited usage of the basic bots (without conversational AI) that users could use only by scrolling and clicking, or by the basic bots with keyword recognition when the bot would provide an answer based on a keyword identified in the customer question (which caused a high percentage of inaccurate answers by such chatbots). Many companies and users thought such chatbots appeared for a few years then proved ineffective and were discarded. It’s time for these people to change their opinion because now technology is much more useful and developed than ever. It often depends only on the business if it will work properly or not – with proper planning, implementation, and continuous development based on customer interaction, feedback, and usage. People used to think that basic bots do not work well, therefore all bots do not work well, but chatbots with conversational AI with proper training can do “magic things”. Chatbots with artificial intelligence nowadays are more flexible than ever and they can be used for customer service and support, marketing, and sales, and many other business activities and personal ones. You can only think of the technology now as a powerful business strategy to implement for further development and growth, especially when you know how to do it or consult with a service provider that knows how things work.

A curious fact is that the first “chatbot” was developed far back in 1966. Eliza was named after Eliza Doolittle and was created by Joseph Weizenbaum, a professor at the Massachusetts Institute of Technology. Fast-forward the time to today, and we have some real advances in the area. For example, in 2006, IBM created Watson, Apple developed Siri in 2010, and then we have Amazon’s Alexa. The last two are smart and have crossed the line to digital personal assistants.

But a few years back in time, all the excitement for the capabilities of chatbots led to the unleashing of a hype wave that not many technological niches have seen. That happened around 2016-2017. At that time, hundreds of millions were spent by some of the biggest companies out there to develop on one side the next generation of conversational AI and on other – chatbot platforms. During and after the pandemic, the need for self-service increased even more, and the trends are staying for sure. People are used to digital services and prefer businesses that offer different ways of online communication especially self-service tools for fast and easy support.

The problem?

For us, at the peak of the inflated expectations for those bots, we were expecting a digital tool that could replace a fully functional human brain. And these expectations were projected onto a relatively young technology (the modern form of conversational AI was only a few years into its development). Obviously, this can’t be achieved so easily, so the problem was not in the chatbots. It was in their implementation (for tasks that are not suited for them, for example) and in the unrealistic expectations of the organizations. This fallacy quickly led society to conclude that this technology would soon die. But conversational AI as a tool continued its growth. With our modern understanding of how to better implement such systems, we entered a new era of conversational AI bots. The global conversational AI market size is expected to reach USD 41.39 billion by 2030, according to a new report. It is expected to expand at a CAGR of 23.6% from 2022 to 2030. Along with the global chatbot market size which is expected is expected to reach USD 3.99 billion by 2030. The market is expected to expand at a CAGR of 25.7% from 2022 to 2030. These are trends that won’t go away for sure, because big corporations and small ones continue to accept the technology into their digital environment for better customer experience and business growth.

A solution arises

After the end of the hype train, conscious companies started to look at the true capabilities of conversational AI. Companies like Skoda, Vodafone, Shell, Shiseido (global corporations in industries such as hospitality and tourism, financial institutions, e-commerce, beauty and fashion, health services, and many more), and many more embraced the technology and leveraged it to reach new levels of growth, sales, and customer satisfaction. But we will take a deeper look at those success stories later; now, let’s see what makes an excellent conversational AI chatbot and what are the most significant advantages it brings to the table.

What are AI chatbots and how do they work?

A popular chatbot definition is that it is a software solution implemented on a website, in a messenger, in a mobile application, or else online, providing users with information through text, images, video, audio, links, and more. Basically, these are the bots that banks use to prompt callers through a phone tree, telling them to say “yes,” “no,” “check my balance,” etc. A bot like this merely lays a chat interface on top of a simple service; no AI is involved. At the other end of the spectrum are chatbots created to be capable AI digital assistants. These more advanced bots leverage the power of artificial intelligence (AI). AI allows the chatbot to mimic a human conversation by recognizing the message sent from the user and, in turn, a more appropriate response provided by the business. These conversational bots are more complex, interactive, and personalized than basic chatbots, in which information is provided just through pre-set information cards, buttons, and links. The so-called smart digital assistants can provide a conversational experience, offer more precise information, and therefore perform more tasks. They also can offer upgraded functionalities, not only a “simple chat”. Conversational AI can be as impressive as the business creates it, and its essence is to “learn” from each user’s communication.

But despite their learning capabilities, reproducing a natural conversation is not an easy task. Such chatbots make use of some of the principles of natural language.

Natural Language Understanding (NLU) – NLU is the process a chatbot uses to understand what the user wants to say using language objects such as synonyms and topics. These are then run through algorithms or rules which are allowing the bot to build coherent dialogues and choose how to respond.

Natural Language Processing (NLP) – Natural language processing is a process implemented to separate users’ input into sentences and words. It also standardizes the text through a series of techniques, such as converting it all to lowercase or correcting spelling mistakes before determining if the word is an adjective or a verb – this is the phase where other factors such as emotions and feelings are considered.

Natural Language Generation (NLG) – providing a logical, personalized experience beyond the pre-set answers. Using this technique, the chatbot can search data in repositories, including third-party databases, and use that information to create a human-sounding response.

With the help of the mentioned techniques and many other tools, conversational AI allows companies to have much more sophisticated dialogue systems in their arsenal, using specific organizations’ information to deliver a realistic and engaging conversation.

These chatbots can perform various tasks, from answering frequently asked questions to automate reservations and service inquiries, gathering customer information, questionnaires, and more.

The benefits

Let’s continue with 12 benefits for organizations using chatbots and, most importantly, how this translates to their customers and employees.

1. Tackling increased volume – for organizations to maintain a healthy number of consumers or grow their consumer base, there is a problem arising on the horizon. The increasing audience is on the one side; on the other is the fact that most of them are using more and more of the companies social media channels or websites to communicate their needs with the organizations, meaning the need for more team members. Or, of course, a powerful AI conversational chatbot to at least partially solve this problem.
2. Saving time and resources – investing in a chatbot is an investment that will potentially have great ROI over time. The main aspect that will save resources for the organization is the employees’ valuable time. Instead of wasting their time on repetitive questions that can be easily automated, employees can focus better on meaningful and complicated cases when only human input is needed.
3. Improving satisfaction with 24/7 availability and instant answers – this is maybe the best side of chatbot usage. Consumer satisfaction can be seriously improved. Let’s think about it… When a visitor arrives on a website, he/she can have almost all of his/her questions answered. Instantly. 24/7/365. Amazing, right? But there is more. Numerous types of research confirm that even employee satisfaction is going up because they are investing their efforts in more exciting and meaningful tasks.
4. Increase in reachability – we briefly touched upon that. Having an employee working around the clock every single day is truly liberating. Yes, some questions can be answered only during working hours but up to 80% of the questions, depending on the business, are routine questions (or tasks) that can be handled easily by AI chatbots and not only during working hours but all day and night. Check your website statistics and you may discover that your customers are more active outside of business hours than before the pandemic. The AI chatbot is the one to take the night shifts, the weekends, and the holidays – convenient for both the customers and the employees.
5. Flexibility – the latest AI chatbots have numerous ways to leverage. They can be a service tool, a planning tool, answering FAQs, generating inquiries, making appointments, collecting data, helping with marketing campaigns and sales, and so much more.
6. More control – with the advancement of modern technologies, companies can individually decide what level of capabilities they want from their new digital helpers. Those chatbot platforms allow the organizations to develop many of the capabilities themself, a feature that provides serious flexibility to them – to create their own chatbot according to the business and customer needs and train and maintain it themselves without any technical knowledge and skills.
7. Increasing sales – The AI chatbot supports marketing and sales by directing potential customers to suitable offers, promotions, order forms, and many more.
8. AI chatbot with personality – Set your chatbot to be fun, compassionate, energetic, or serious. It represents your business so make it with witty character, to tell funny jokes or only business information – as you want your AI chatbot to be a part of your business family. A well-designed and maintained AI chatbot is a great instrument for branding and customer loyalty.
9. Easy to use – The AI chatbot does not require the users to download, install and learn any new applications. Just chat on the business site!
10. Motivated employees – Your team members desire to develop new skills. Get rid of the monotonous work and give them time for professional development. The AI chatbot help to reduce the routine so employees feel more useful to the company and stay more loyal to it.
11. Attracts new staff – Young and talented people are looking for digital companies that will help them integrate into the team without any problems. The AI chatbot is perfect for onboarding new employees for the company’s mission and vision and its culture by learning new information through the bot.
12. Creates opportunities – The chatbot frees up time for employees to communicate with customers when they really need human attention or to perform more complex tasks which creates opportunities for further development of the company.

After we learned about the basics of conversational AI chatbots and their capabilities, let’s take a look at some examples of using this technology to its full potential.

The success stories

When an organization creates a chatbot, there is a good question to be answered beforehand – what the chatbot exactly is expected to be able to do? The organizations that had these answers had achieved incredible results. Let’s take a look at some of the brightest examples.

Let’s start with a hotel AI chatbot

42% of the inquiries through the hotel AI chatbot happen at night. The hotel had an old site and no customer communication automation. There were many phone calls during the day and even during the night by customers asking many questions related to the hotel activities. All incoming calls were taken directly by the hotel Manager which led to longer working hours every day and caused a delay in her hotel duties. The hotel manager decided to make a change in favor of the business, its customers, and its employees. She chose to change the old site with a new landing page with a hotel AI chatbot.

The results in the first 10 months were amazing. There were over 700 inquiries from customers from 13 countries with over 12,600 users that made over 71,000 actions in the chatbot. 38% to 41% of requests through the chatbot are submitted outside working hours which explains why the manager had to answer the calls while relaxing and now she only takes the more complex hotel tasks while the AI chatbot is available 24/7/365 to assist the guests instantly.

Beauty salon

All administrative tasks related to the communication with customers for appointments for beauty procedures, revisions, cancellations, and routine questions took too much valuable time from the salon team members which negatively affected the customer service at the salon. The solution was to implement an AI chatbot that will assist the beauty salon customers with new appointments, revisions, cancellations, and booking promotions through integration with the salon reservation system, as well as answering FAQs about the offered aesthetic procedures by using conversational AI.

The results didn’t delay. For just a few months since the implementation of the chatbot now 100% of customers who want to take advantage of promotion make a reservation only through the bot and every day there is at least 1 new reservation made through it. 30% of the new customers make their reservation via the bot which proves that not only those who are introduced to the technology use it but also those who do not know about it and accepted it very quickly. As a result of the AI chatbot implementation, the Beauty salon succeeded to bring to Zero the number of no-show appointments.

Library

The library employees are not available 24/7. Old-fashioned communication ways (phone, handwritten materials) in the library have been replaced by modern communication channels, such as e-mail, online chat, and messenger, which took a lot of time from the librarians and interrupt their daily tasks affecting their efficiency.

A decision was made – the implementation of an AI chatbot as a digital librarian to help with the work process. The tasks assigned to the digital librarian upgraded the existing services – providing information on library topics, reassignment of borrowed literature, etc. Since the implementation of the AI chatbots, it saved time for at least 2 librarians with over 15,000 customer questions handled and an increase in the communication between readers and the library. The AI chatbot handles over 20% of the reassignments of borrowed literature.

Tour operator

Hundreds of saved working hours and thousands of timely served customers with the help of an AI chatbot. Messages on Facebook and the chat on the website became so numerous that they took an average of 4 to 6 working hours per day from the time of 1 employee per 8 hours of work resulting also in delays in the response to customers affecting customer service and sales.

The tour operator wanted to make a change for the good of the business and implemented an AI chatbot for assistance in making reservations, collecting customer inquiries and customer data for better customer service and support. In just a few months, over 4200 customers have communicated with the chatbot, with over 30,000 messages responded to, over 1100 inquiries collected successfully, and 850 working hours saved to the staff. Another successful chatbot story!

Dermatology clinic

The dermatology clinic noticed that up to 80% of the incoming questions through social media went unanswered which cost an 80% outflow of new patients. In addition, each communication with a customer used to take up to 15-20 minutes to the Account Management, which led to team overload and low performance.

It was time for a change – the implementation of an AI chatbot that will respond to every new message to get the customer data it needs, send customers’ inquiries to a specific field, provide detailed information about the clinic procedures, and also assisting with appointments. In 16 months since its implementation, the chatbot answered over 10,000 messages sent by over 1,400 customers, 35% of the communication happened at night after 18:00 and it was trained to 125 topics about aesthetic procedures and clinic services to assist all customers 24/7/365.

Marketing project for food and beverage company and wholesaler

A purebred marketing chatbot that has another mission: to entertain users, inspire them every day and be one click away when they want to have an informal chat with someone. The chatbot is made to send good luck messages (one per day) to all its users and encourage them to return the next day to get their new one – it is exciting for all – young and old. The chatbot can only “nap” between 3:00 and 6:00 in the morning when even its most passionate fans are asleep, and on its busiest day, it reached over 70,000 interactions with its fans. That way customers feel close to the brand and its communication with its users feels priceless.

As you can see from the 6 success stories, it is evident that there are valuable real-world applications for chatbot technology — especially for chatbots with a more specific focus. The industry doesn’t matter, all businesses can have an AI chatbot for different purposes and can achieve impressive results.

AI chatbot technology for sure is not something new, it is the present and the future and if you want to be part of the digital world, now is the time to embrace it and start your chatbot journey. If you have your priorities cleared and a smart chatbot is one of them, then feel free to contact us for a consultation for your business. We will be glad to advise and share a piece of our expertise in the chatbot field.