What is an AI Chatbot? Definition, Benefits, Functionality

Posted on 8 June 2024

Multiplle use cases of an AI chatbot
Image: There are multiple use cases available for AI chatbots such as customer service, lead generation and knowledge management

About This Guide

The 21st-century artificial intelligence (AI) technology is already deeply integrated into many areas of our lives. With its great potential, it is expected to evolve even further in the coming years. AI is ready to assist you with everyday tasks and boost your business. This article will guide you through the world of chatbots and show you what AI chatbots are capable of today. Using examples from various industries such as e-commerce, travel, and customer service, you will get an overview of the current possibilities that an AI-based chatbot can offer.

Definition: What is an AI Chatbot?

An AI chatbot is a technical dialog system that enables the interaction between humans and technical systems. The conversation can take place via spoken language or text. An AI chatbot always offers an option for voice input and output, usually through a chat widget or chat window. As the name suggests, an AI chatbot is based on artificial intelligence and understands human language through Natural Language Processing (NLP). The system does not process mere keywords but understands the user's intention within their message and creates a semantic search query to find the meaning in the database.

Artificial intelligence combined with a chatbot offers great development potential: the AI can solve simple tasks independently, provide users with recommendations through predictive analytics, or cluster user insights and formulate new topics through dreaming. These features and capabilities distinguish an AI chatbot from a rule-based chatbot that does not rely on artificial intelligence.

What is the Difference Between a Rule-Based Chatbot and an AI Chatbot?

There are now many chatbot providers and solutions, and the chatbots themselves can vary significantly. Essentially, there are two types of chatbots: those based on predefined rules and decision trees, and those based on artificial intelligence. Rule-based chatbots are often referred to as "click bots" because users rarely input their queries as free text but instead click on buttons provided by the chatbot.

Rule-Based Chatbot AI Chatbot
Usually does not offer free text input as it is not NLP-based. Offers free input in the form of speech or text. NLP allows it to "read between the lines" and recognize the user's intention even in long texts.
Mostly click-based: users can navigate through the chat by clicking on predefined options. There are clickable options, but there is always an option for free text or speech input.
Cannot predict trends due to limited user possibilities (predefined conversation paths). Can analyze preferences and trends from free text inputs and natural conversation flows to generate recommendations and suggestions.
Minimal risk: every user receives an appropriate answer after clicking. Some user queries may not be answered if they are not understood or if there is no response available.
No "wow" experience for users, just an information source to click through. Often a "wow" experience. A well-trained AI chatbot surprises users, provides answers to complex queries, and can engage in small talk and tell jokes.
Companies can steer users towards a specific goal by offering only a specific selection of buttons/options. Users are free to choose the topics they want to know more about.

How Does an AI Chatbot Work?

Despite the many different chatbot solutions available, the principle of operation is always the same:

A chat window exists, for example, in the form of a chatbot widget or integrated into a messenger app (e.g., WhatsApp, Facebook Messenger). Here, the user can type or speak their concern, question, or command. The AI chatbot receives the message. Using Natural Language Processing, it processes the message and identifies the user's intent. The AI chatbot then responds to the user in various forms, such as voice-bots that reply in spoken language or AI chatbots that respond with texts, videos, images, or other multimedia elements.

In Summary: The AI Chatbot Works in Three Steps

1. Processing the User's Request: The AI processes the user's request based on natural language processing (NLP) with a large language model (LLM). This means that the AI does not explicitly search for keywords but determines semantic relationships and derives the user's concern.

2. Searching the Database: After determining the user's intent, the AI chatbot searches the database, which can consist of documents and URLs, with multiple queries. It finds the relevant sections (chunks) for the appropriate response and passes them to the LLM.

3. Comparing and Generating the Response: The LLM compares these chunks, checks the relevance of each search result, and then sends the most probable response in the form of a generated text reply to the user.

Benefits of an LLM Compared to Traditional AI Chatbots:

1. Foreign Languages and Language Comprehension: AI chatbots with an LLM can understand and respond to queries in over 80 languages. They can communicate with users in any common language

such as English, German, French, Italian, Spanish, Dutch, Croatian, Greek, Swedish, Polish, and even Asian languages like Chinese, Japanese, or Korean.

2. Spelling Errors: The AI chatbot can independently correct spelling errors and still understand the sentence. This also works for sentences that only humans could otherwise read. For example: "Knnts du mri saen bo du ads lseen kannts?" Even such a request is no problem for an AI chatbot with an LLM and can be processed.

3. Context: The entire chat history is passed to the LLM each time, so the current question is always asked in relation to the previous questions. This allows the AI to also respond to questions that can only be understood in the context of previous questions.

4. Cost: Since the implementation can be relatively simple by feeding selected documents in common formats (PDF, Word, TXT, Excel) and URLs, the effort and costs for setup are relatively low, allowing for cost-efficient operation of the AI chatbot.

Benefits of an AI Chatbot

An AI chatbot brings many benefits to businesses through accelerated and automated communication:

• Faster Response Processes: Customers do not have to wait in phone queues, click through FAQs, or set up an email and wait for a response. With an AI chatbot, they can type in their question and receive an answer within seconds.

• Feedback and Development: Once a chatbot is initially trained, it continues to develop based on the conversations it has with users. Each response can be rated with intuitive buttons for "thumbs up" or "thumbs down." This feedback is visible to service staff, who can update the database accordingly. As the chatbot evolves based on real conversations, it grows alongside the actual needs and desires of the chatbot users.

• Ease of Use and Handling Despite Complex Technology: This applies to both companies and users. While the AI mechanisms and technology themselves may be complicated, most AI chatbots offer user-friendly and UX-optimized interfaces on the front end that can be used without in-depth technical knowledge or IT skills.

• Low Effort and Quickly Amortizing Costs: Once the AI chatbot is set up and implemented, it does not take much effort for companies to operate it. Since the AI chatbot can answer thousands of inquiries simultaneously, the costs incurred for an AI chatbot are quickly amortized.

• Self-Service Saves Employees and Customers Time: Self-service options, like those provided by an AI chatbot, offer real advantages both internally for the company and for users. It saves time and effort on the company's part while allowing users to receive the answers they need or perform activities, such as downloading a certificate or adjusting their phone number, independently and instantly, 24/7.

• AI Chatbot-Human Handover: Some issues cannot be solved by a chatbot and require human intervention, such as very complex concerns or emotionally charged cases. Although communication via AI chatbot means a conversation between a human and a machine, this process can be interrupted and handed over to a human at any time upon the user's request. Users are never "trapped" in a chatbot conversation. Thanks to the so-called human handover, conversations can be handed over from the AI chatbot to a human employee via email or live chat. Thus, there is nothing standing in the way of an ideal collaboration between humans and AI chatbots.

Suitable Application Areas for AI Chatbots

The main application areas for AI chatbots are in customer communication for companies, primarily in marketing & sales and customer service. In both cases, they ensure that questions and concerns are answered automatically, allowing users/customers to receive quick responses and be advised promptly.

AI Chatbot in Customer Service AI chatbots are typically known from the field of customer service, where they are often used as digital assistants to help website visitors and customers. They usually answer recurring and simple questions that come up repeatedly. About 80% of all incoming questions to customer service are of a recurring nature. This offers a great automation potential that can be ideally filled by AI chatbots. The AI chatbot answers repetitive questions, allowing employees to focus more on complex problems.

AI Chatbot in Marketing and Sales AI chatbots can also be successfully used in marketing and sales. For example, they provide product consultations, engage customers with temporary actions like quizzes built into the chatbot, and automatically request contact information when there is interest in a product or service. They also make navigation on the website easier, which is especially valuable for large online stores or websites with a lot of information.

AI Chatbot in Human Resources (HR) AI chatbots can also be used in the HR sector for various tasks such as recruiting, applicant and employee management, onboarding and offboarding, training, and further education of employees.

Industry Applications of AI Chatbots

Because AI chatbots are highly adaptable and customizable, they can be used in almost any industry. They can be deployed wherever questions need to be asked and answered. Here are the most popular industries for AI chatbots and the benefits they bring to these industries:

AI Chatbot in E-Commerce

  • Convert website visitors into paying customers
  • Help customers navigate the store better
  • Increase customer satisfaction by providing instant help
  • Scalable service offerings, even during seasonal peak or growth phases

AI Chatbot in Finance

  • Maintain high-quality customer support
  • Offer top-notch service at very favorable conditions
  • Stand out from competitors through service quality
  • Provide real-time support to assist customers anytime

AI Chatbot in Tourism

  • Offer global service around the clock, 24/7
  • Dynamic multilingualism that can switch depending on the language spoken
  • Automatically provide up-to-date information (e.g., weather information)
  • Omnichannel capability: An AI chatbot can be used simultaneously on WhatsApp and the website

AI Chatbot in the Energy Sector

  • Offer simple self-service, e.g., for address changes and submissions of meter readings
  • Relieve support staff so they can focus on more complex tasks
  • Provide quick automated responses to standard topics such as advance payments
  • Allow employees more time to focus on complex issues and concerns

AI Chatbot for Educational Institutions

  • Stand out from other institutions with a modern and innovative communication channel
  • Provide a multilingual contact point for international students
  • Offer barrier-free contact options for students and interested parties
  • Generate more applications automatically

AI Chatbot in Industry

  • One channel for all target groups: Whether B2B, B2C, or B2B2C – the chatbot has answers for everyone
  • Generate leads through built-in forms in the chatbot
  • Prequalify contacts: A chatbot navigates users and prequalifies them
  • Automate recurring questions from end customers

AI Chatbot in Publishing

  • Prevent paywall drop-offs: Convert visitors into paying customers
  • Improve subscription shop service: An AI chatbot handles customer consultations
  • Efficiently automate recurring questions
  • Editorial design of the chatbot remains with the company

Conclusion: AI Chatbots, the Customer Communication of the Future

An AI chatbot is a digital assistant that takes on and performs many tasks that would normally require human intervention. Whether you are looking for a reliable constant in customer service or want to entertain your target audience and offer an innovative communication tool – communication with the use of AI chatbots works on all levels.

In summary, chatbots are definitely the future of customer communication in businesses. The term "artificial intelligence" has been used increasingly and sometimes very loosely in recent years. We hope that after reading this article, you now have a better understanding of what AI is and how it can be used in modern business applications.

Is your thirst for knowledge not yet quenched, and would you like to know what a chatbot could look like in practice? Create an AI chatbot tailored to your use case in four steps – completely free and without obligation.

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