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What is a chatbot?

A chatbot is a software application that’s used to engage in human conversation in a natural way. Chatbots are commonly used across many different industries for many different purposes.


Chatbots use artificial intelligence (AI) and natural language processing (NLP) to help users interact with web services or apps through text, graphics, or speech. Chatbots can understand natural human language, simulate human conversation, and run simple, automated tasks. Chatbots are used in a variety of channels, such as messaging apps, mobile apps, websites, phone lines, and voice-enabled apps.

Chatbots can be developed to handle just a few simple commands or to serve as complex digital assistants and interactive agents. A chatbot can be a part of a larger application or be completely stand-alone.

Read this guide to learn more about what a chatbot is and how chatbots work.

Why use chatbots?

Chatbots are used to help humans interact with technology and automate tasks. Improvements in AI, machine learning, data science, and natural language processing have enabled the proliferation of chatbots by making it easier to build conversational bots for a variety of applications that benefit companies, their customers, and their employees.

How companies use chatbots

Chatbots provide a number of 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 personalised 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 organisations invest in more and 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 organisations 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, analysing, 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 recognises 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 to 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 a business can use: transactional chatbots and conversational chatbots. Their main difference is 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 enquiry and generate automated responses that are designed to be conversational. Interactions with transactional chatbots are trained on structured data, which makes them very 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 personalised 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 personalisation based on each user’s profile and previous behaviour. 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.

What are some general business applications for chatbots?

Customer service

Chatbots can be used to create virtual customer service agents that are always available, which leads to more satisfied customers. 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 supplier details.


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


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

How are chatbots used in different industries?

Companies in every industry are benefiting from using chatbots for a wide variety of purposes. Here are just a few examples of how chatbots are being used every day:

E-commerce and retail

Online stores use chatbots as customer service agents to provide product information, offer personalised 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.


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


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


In the insurance industry, chatbots serve as virtual agents and advisors to file claims, provide status updates, and perform other basic tasks, freeing up humans to perform more advanced tasks.


Chatbots help manufacturers with supplier 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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