What Is a Chatbot and How It Works: Types, Flow, and Benefits for Businesses

In certain industries, their concentration rate on B2B companies’ websites is 58%. And it’s predicted that the chatbot introduction is about to grow at a CAGR of 23.3% by 2030. Businesses that have implemented AI chatbots indeed witness remarkable improvements in customer communication, complaint resolution, and operations automation.

This article is dedicated to chatbots, their types, and the benefits they bring into businesses’ daily operations. It’s a must-read for those who, before they contact an IT team that knows how to create an AI chatbot, want to know why to use AI chatbots.

What Is a Chatbot?

This is a program type that interacts with users by text or voice. AI-based chatbots are designed to feel and sound natural during such interactions. They are not significantly different from traditional human dialogues. Such chatbots are integrated into websites, mobile applications, messaging applications as well as different OS's.

The first chatbots (now called traditional) were introduced on e-commerce websites and were able to provide a channel that users needed to go through to have all their questions answered. They were and still are empowered to provide replies to FAQs or redirect users to human support team members in case of a complex-to-handle issue. Such chatbots execute pre-written scripts and communication flows.

Later, there appeared more advanced chatbots with less scripted conversation mode. They were the ancestors of modern digital/virtual assistants, able to perform diverse text-/voice-originated tasks through different integrations. They developed into an impressive list of chatbots known today.

Top 6 Types of Chatbots

Every chatbot has a unique strategy. Those understanding strategies are capable of choosing a chatbot to match their unique business needs. So, let’s take a look at the top most popular chatbots of 2024.

Rules-Based

Among all available chatbot types, rule-based ones are translated as the most reliable and consistent. They use complicated or simple rules, yet need help generating answers that step outside them. Rule-based chatbots cannot be taught through interactions. They only perform in given scenarios.

Yet, they have benefits that are challenging to neglect:

• They are less expensive
• They can integrate with legacy systems
• They are highly secure
• They offer media and interactive elements
• They aren’t restricted to text communication only

Most businesses that choose rule-based chatbots are applying them for lead generation.

Menu-Based

These chatbots have menu options/buttons with a pre-determined flow of communication. This is possible due to a previously integrated knowledge base with a set of questions. Thanks to these buttons, chatbots better “understand” the intent of a user and can preserve the context throughout the whole interaction. Responses in this case are quick and efficient. Communications often feel human-like.

The benefits of menu-based chatbots are:

• Improved user experience
• Ease of use
• Workload decrease for human employees
• Simple user guidance
• Reduced ambiguity

This chatbot type is highly valued by e-commerce businesses, where users often need to be guided to check out.

Keyword Recognition-Based

This chatbot type uses AI models and automatic language processing to comprehend requests and reply to them. The models identify keywords and offer responses that are more nuanced and accurate. The keyword technique extracts relevant information, an algorithm analyzes it and then provides appropriate responses.

The benefits of keyword recognition-based chatbots are as follows:

• Excellent automated responses to common queries
• Consistency of responses and accurate information
• Workload reduction for human support agents
• Ability to handle high volumes of requests without long wait times
• Knowledge consolidation from various sources
• Across-platform availability

The effectiveness and benefits of such chatbots are best suited for use cases where queries are predictable and can be addressed through a list of predefined keywords.

Contextual

Contextual chatbots are known for their ability to preserve a conversation over different interactions. This is how they deliver tailored replies. Such chatbots utilize ML and AI technologies to comprehend the intent behind queries.

As for the benefits of contextual chatbots, these are:

• More natural and intuitive user experience
• No-delay replies to ensure users are not left waiting
• Ability to scale operations and handle thousands of conversations simultaneously
• Ability to gather and analyze customer data for future endeavors
• Significant savings eventually

They are often used in the food industry, healthcare, travel business, fintech companies, and smart home technologies.

Voice-enabled

They are trendsetters now and represent the evolution in NLP, AI, and ML that can change the way how customers and service/goods providers communicate. Advanced NLP allows mimicking human conversation, all replies are instant and contextual. And users don’t need to adapt to a certain format or command structure.

Of course, this chatbot type has more than one benefit:

• They collect and process large data amounts from interactions
• They can operate across many communication channels
• They handle numerous queries simultaneously, thus saving expenses on human managers
• They address more custom matters that require a personalized approach.

Initially, they were mostly used by call centers. Today, they’re also popular in e-commerce, healthcare, and fintech.

Hybrid

The name says for itself: hybrid chatbots are a combination of various chatbot types that offer combined strengths. This is a combination of rule-based chatbots and AI-powered ones. The rule-based part ensures interaction consistency and reply occurrence. The AI-powered side empowers them to handle complicated demands.

Hybrid chatbots have several major benefits:

• They enhance customer engagement
• They ensure more flexible, natural, and relevant communication
• They reply to a wide range of questions more quickly and accurately
• They guarantee more personalized approaches thanks to AI

Hybrid chatbots bring the best of two worlds, AI and traditional technologies. This is why they’re becoming more popular than other options.

How Do Chatbots Work?

Let’s focus on AI-based chatbots that are slowly substituting more traditional chatbots and winning the market.

Their work resembles a work of a multi-layered system:

• Natural Language Processing: NLP allows computers to understand human language and process it. NLP is now widely used by AI programs and chatbots for comprehending basic phrases used in human communication. Natural Language Processing is divided into such tasks as tokenization, parsing and tagging, intent recognition, entity gathering, and sentiment analysis.
• Machine Learning: ML uses a set of constructions and rules that are then followed by a chatbot to comprehend a conversation’s words. ML algorithms are diverse. Yet, they can all be divided into two major groups, unsupervised and supervised. For unsupervised learning, algorithms receive data sets without variables and labels. In this case, an algorithm finds patterns by itself. For supervised learning, algorithms receive sets of data with pairs (input, output) and can learn from them.
• Neural Linguistics: This is the combination of NLP and neural networks that allows computers to comprehend human language and generate it. For AI-based chatbots, NL allows chatting with people in a way human support managers can, since with neural linguistics, chatbots understand the intent, sentiment, and content behind users’ queries.
• Large Language Models: LLMs are AI tools trained to comprehend natural language texts and generate them. The core of LLMs is Deep Learning. LLMs give Artificial Intelligence access to sets of data like texts. In turn, Artificial Intelligence utilizes relationships and patterns between words or phrases to train AI models. The more data is received for training, the more accurate a chatbot works.
• Custom Language Models: CLMs are trained through data specific to a certain industry. This is why CLMs are very precise and highly specialized. CLMs for chatbots are to be trained on millions of real customers’ conversations to be able to give relevant and accurate replies.

Benefits of Chatbots for Business Owners

They provide many benefits to end-users in terms of the accuracy of replies and the speed. But it’s business owners who gain the most from introducing chatbots into their operations. So, let’s focus on the benefits of chatbots for business owners.

Cost Savings

This is the biggest benefit of all. Regardless of the chatbot type, businesses can automate most tasks traditionally performed by a human support team. This reduces the workload on human managers. In perspective, the team size will decrease. And this has no negative effects on the support quality.

Enhanced Customer Experience

Whether it’s an advanced AI-powered chatbot or a traditional one replying to FAQs, customer satisfaction increases many times. Most chatbots offer more personalization in their replies after previous conversations and order history analysis. This increases customer satisfaction and loyalty.

Better Sales

Businesses looking for what to stay on top of today’s competitive market need to use chatbots to draw on the wealth of insights about consumers. This allows us to build personal approaches in communications and more successful marketing campaigns, through cross-selling and upselling, too.

Increased Productivity

AI chatbots can be used not only for customer support but also in other business operations. In this case, they will act as smart digital assistants helping across departments. By helping to automate man routine tasks, chatbots cut down time and unlock human resources that now can focus on strategies.

Better Scalability

Chatbots offer businesses scalability when it’s time to expand operations to manage customers’ growing demands. Unlike human managers, chatbots know no sleep and don’t need time for rest. They can easily handle millions of customer interactions simultaneously, and ensure scalability with no risk to efficiency or quality.

Bottom Line

Chatbots are now shaping the future of customer service and routine internal operations. The approach they offer is smarter, more effective, and more personalized. From a business perspective, they bring speed, scalability, and efficiency to the table. For customers, they guarantee better interactions and improved experiences. This is a win-win strategy.

If you’re looking to the future and feel excited about new possibilities, consider implementing chatbots now. Be sure, you will win tomorrow.