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What Is a Chatbot: A Small Business Guide

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A chatbot, short for chatterbot, refers to computer programs that automate text- and voice-based communication. Chatbots are conversational applications that support market engagement, customer service, and technical support. Read on to learn more about what a chatbot is, how it works, its common uses, and the key benefits of using this technology to grow your small business.

Key Takeaways

  • Chatbots, also known as chatterbots, are automated programs often used in messaging apps that interact with customers like human agents.
  • Some examples of artificial intelligence (AI) chatbots include automated response settings used by businesses in Facebook Messenger and Amazon’s Alexa.

How Chatbots Work

Chatbots function based on predefined rules and commands and typically handle straightforward interactions regarding products, services, and policies. The interaction is usually escalated to a human operator when a customer needs assistance beyond the chatbot’s capabilities.

Now that we’ve covered the chatbot definition, to illustrate how a chatting bot works, here’s a typical interaction flow of a chatbot and a customer on a business website:

Step 1: The user initiates a conversation by typing a message into a website’s pop-up chat interface, or the business automatically initiates a chat prompt when the user visits one of their pages.

Step 2: The chatbot utilizes natural language processing (NLP), a machine-learning technology that enables computers to interpret and comprehend human language. The chatbot analyzes the words and phrases in the message to determine the user’s intent.

Step 3: The chatbot matches the intent or concern with a pre-programmed response from its database. The system sends the response or answer to the user via the interface. The client is either satisfied or continues to respond, continuing the conversation.

Chatbots are designed to work independently without human intervention or assistance. Modern chatbots are intuitive and able to mimic the art of human conversation. They learn through processing data (responses and conversational patterns) and knowledge databases that store information. Chatterbots learn through syntax, word usage, interaction exposure, and sentiment analysis technology.

Still, chatterbots require human intervention during programming and auditing to ensure high-quality responses and conversations are maintained. This process is called “human in the loop.” Over time, bots build a neural network, making them self-sufficient. Without humans in the loop ensuring high-quality results, machines can learn unnecessary things and develop inappropriate conversational lines.

Chatbots are software applications designed to hold conversations through text or voice interactions. AI chatbots are driven by automated rules, NLP, and machine learning (ML) to process data and simulate human conversations through voice commands, text chats, or both. Use AI chatbots to automate repetitive tasks, cross or upsell products and services, collect user data, create customer lists, and identify qualified leads.

In a nutshell, AI chatbots are more advanced bots that use AI and NLP to understand the user’s input and easily navigate complex conversations. This technology enhances operational efficiency by functioning independently of human operators. When presented with inquiries, chatbots utilize their knowledge database and respond using a blend of machine learning algorithms and preprogrammed scripts as if they were real people.

Types of Chatbots

Chatterbots range from simple chatbots answering basic queries to sophisticated bots capable of evolving as they gather more data. For now, you can broadly categorize chatbots into three types: simple, AI, and hybrid. Aside from understanding what a chatbot is, it’s essential to grasp the various types of chatbots based on their capabilities.

Simple chatbots, also known as rule-based bots, are task-specific bots with limited capabilities. These bots usually give users different options and allow them to select a category based on their concerns. The chatbot offers an answer or information related to that query. Unlike advanced bots, these task bots do not make any inferences from previous interactions and are best suited for simple tasks like replying to frequently asked questions (FAQs).

These chatbots operate based on the if-then logic, and conversation workflows are based on set processes and dialogues. For instance, a local pizzeria’s website chatbot will ask questions about your preferred pizza size, toppings, and crust. After finalizing the order, the chatbot will prompt the customer to provide their address and payment method. This structured conversational flow remains consistent and can be reproduced with minimal variations.


AI-enabled intelligent chatbots use AI, NLP, and MP technologies to understand what users are trying to say. Chatbots continuously learn about conversational patterns and have free-flowing conversations with users, paying close attention to language, sentiment, and intent. With more user interactions over time, intelligent bots learn and can improve independently.

When comparing AI chatbots to rule-based bots, it’s important to note that while simple chatbots only interpret questions based on specific keywords, smart chatterbots understand the complete context of user intent. AI bots can engage in small talk and retain data from previous conversations like the customer’s shipping address and billing info. However, smart bots are more challenging to execute and require more data and interactions to work optimally.

Automated virtual assistants are a great example of smart bots as they learn from each human interaction and give the most relevant response based on available information. To better understand how AI bots work, consider the same Pizzaria example: Some AI bots can identify if you’ve ordered before and ask if you want to place the same order again.


This third type of chatbot mixes AI and rules-based chatbot technologies. When appropriately integrated, hybrid chatbots can allow you to use chatbots and live chat technology simultaneously. As the “middle ground” between the other two types of chatbots, hybrid bots combine rule-based tasks and understand context and intent, allowing for more flexible interactions.

Hybrid chatbots can be used in various industries, including travel and hospitality. Customers can message a travel agency, which will assist them with booking flights and hotels. Based on parameters identified by the client, AI will make travel recommendations and personalized itineraries.


The History of Chatbots

The earliest version of chatbots was ELIZA, created in 1960 by a Massachusetts Institute of Technology (MIT) computer scientist. The simple chatbot used natural language understanding (NLU) and attempted to mimic a psychotherapist. PARRY was the next breakthrough chatbot created in 1972 by psychiatrist Kenneth Colby of Stanford University. An exact opposite of ELIZA, PARRY attempted to simulate a person with paranoid schizophrenia.

PARRY’s responses were modeled after the behavior of a person with paranoid schizophrenia. It was considered more advanced than ELIZA because it embodied a conversational strategy. Over the years, PARRY and ELIZA interacted with each other, showing the potential of AI and automated bots.

According to a research report by Statista, the chatbot market is expected to reach around $1.25 billion in 2025, up from $190.8 million in 2016. Thanks to technological advancements, the rise of mobile usage and ecommerce has led to the increased popularity and sophistication of chatbot software. The convenience of ecommerce and the shift from traditional business platforms to digital channels have fueled the continuous improvement of chatbot software.

Modern chatbots have evolved from simple answer and question tools to connect with customers, automate workflows, schedule appointments, and reduce operational costs. Chatbots have come to play a crucial role in driving customer service and marketing applications forward. These virtual intelligence assistants in operating systems, like Windows’s Cortana and Google’s Alexa, perform different functions based on user commands.

The Future of Chatbots

In terms of adoption and use, the trend is to push chatbots as far as they can go. Over time, we can expect chatbots to be more human-like, revolutionizing chatbot versatility and the user experience. As chatbots dominate retail and customer support, chatbots in finance and payments will evolve, expanding online payment gateways. We will also see more use of AI in contact centers, offering unparalleled efficiency in solving complex client queries and concerns.

Common Chatbot Uses

Businesses employ chatbots to automate standard processes and reduce reliance on live operators and customer support representatives. Chatbots are always available to attend to customers and are not limited by geography or physical location. Businesses frequently employ bots to streamline their operations and call center phone systems, as they reduce the need for human resources and serve as a cost-effective method for customer interaction.

It’s important to understand what a chatbot is, but knowing when to use it is equally important to maximize your investment. Here are some ways companies of all sizes are utilizing chatbot technology:

  • Website support: Use chatbots as your team’s initial point of contact and assist customers in navigating your website. For example, chatbots can update clients on limited-time promotions like Black Friday discounts, push for new products, or encourage free trial signups.
  • Marketing: Use bots on messaging platforms such as Telegram to inform customers about your latest deals. Configure your marketing chatbots to take orders and guide clients through the sales funnel. Integrate a marketing chatbot with customer relationship management (CRM) software, which retains names and interaction history, to help bots generate more personalized responses.
  • Order taking and processing: Reach a broader audience and configure chatbots to take their customer orders, cross-sell products, and share quotations. For instance, chatbots can assist customers in reporting their subscription payments without speaking to an agent.
  • Customer service: Automating repetitive tasks and personalizing support will enhance agent productivity and deliver a positive customer and employee experience. A concrete example includes deploying chatbots to handle customer questions simultaneously, allowing your service team to help more customers at scale.

Advantages & Disadvantages of Chatbots

Chatbots are typically a business’ first line of support interaction because they’re a convenient and cost-effective way to provide customer support 24/7 year-round. You can integrate them through various channels like websites, messaging and mobile apps, voice assistants, and social media. Customers provide personal data during their interactions based on their profile and history, and AI bots can personalize interactions to create a better customer service journey.

One of the main advantages of chatbots is the time savings and efficiency employees gain. By leveraging chatbots and including this technology into your voice-over-internet-protocol (VoIP) phone system, live agents are freed up to focus on more complex or high-profile customer service or sales rather than spending time tackling standard and tedious questions and concerns.

Despite notable advancements, AI chatbots can still err in understanding customer input and sentiment. Users are often frustrated by chatbots’ limited capabilities and lack of emotional comprehension and empathy. Chatbots’ effectiveness depends on the quality of their databases and programming. Moreover, implementing and maintaining chatbots can be costly, particularly when frequent customization and updates are necessary.

Best Chatbot Providers

If you’re interested in conversational tools like chatbot software, finding the right solution with the right tools that fit your budget is vital. To help you make the best decision for your small business, here’s a breakdown of the leading chatbot providers with robust features:

If you find chatbots and AI technology unsuitable for your operations, live chat and virtual human agents might be more appropriate for your company. Read our chatbot vs live chat to know how these differ.

Frequently Asked Questions (FAQs)

No, a bot is a generic word for software that automates workflows and tasks. Comparatively, a chatbot is a type of bot created to simulate human conversation. However, some people use the term “bot” as shorthand for “chatbot.”


An FAQ chatbot is a simple bot designed to answer common user questions, such as business operating hours and return policies, using a conversational interface. These types of chatbots address customers’ basic inquiries using natural language.


The cost varies depending on the platform you’ll use and the complexity of the chatbot technology you plan to deploy. Generally, you can use a chatbot service provider that charges between $15 and $50 a month, while creating a custom chatbot costs $20,000.


Bottom Line

Chatbots are conversational applications that handle various business tasks, like gathering information on prospects and responding to time-consuming customer inquiries. Armed with a better understanding of what a chatbot is, we recommend carefully evaluating your needs to decide if you’re better off with a straightforward, simple menu solution or a sophisticated, robust AI-powered chatbot.

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