What is an AI chatbot?

An AI chatbot is a computer program that simulates human-like conversations with users over their preferred messaging platform. AI chatbots, unlike regular rule-based chatbots, use natural language processing (NLP) to evolve and understand language outside of pre-programmed commands. They learn by interacting with customers, recording and analyzing high volumes of customer data and then, using the results to create a response. The more the AI chatbot interacts, the better it gets.

What is an AI chatbot

History of chatbots

Chatbots have been around for a while now, but quite recently they have gained real popularity among users and businesses. The first chatbot ever was developed by MIT professor Joseph Weizenbaum in the 1960s, called ELIZA. It was the first machine capable of speech using natural language processing.

ELIZA was able to make many people believe that they were talking to a human by substituting their own words into scripts and feeding them back with answers to maintain the conversation flow. Ever since the inception of chatbot technology with ELIZA, many more chatbots like PARRY (1972), Racter (1984), ALICE (1995) and newer ones like Siri (2010), Alexa (2015), Cortana (2015) have been made. The chatbots got more conversational, better able to understand natural language and much more sophisticated with time.

However, the real revolution began when early in 2016, social media platforms like Facebook enabled developers to build a chatbot for their trademark or service. These messenger bots, which are widely used by companies around the world today, allowed customers to start a dialogue with a company by simply clicking on the messenger button. Conversational AI applications have since been used by enterprises worldwide to automate customer support and other functions within an organization.

History of chatbots

What are the types of chatbots?

1. Rule-based chatbots

Rule-based chatbots, also known as flow-based or linguistic chatbots, use a tree-like flow instead of AI to answer customers’ questions. They are embedded with a series of predefined rules that they use to understand and resolve an incoming query. These chatbots are limited to answering only a specific set of questions.

2. Keyword recognition-based chatbots

As the name suggests, these types of chatbots look for certain keywords in a customer’s query to present them with a suitable answer. They are an extension of rule-based chatbots and are quite useful to answer repetitive or frequently asked questions (FAQs).

3. Menu-based chatbots

Menu-based chatbots, also called button-based chatbots, provide customers with a series of options to choose from in the form of menus and buttons. Depending on what the customer chooses, the chatbot then answers the question. They follow a predetermined path or a decision tree, like rule-based chatbots that help them find the exact answer to a question.

types of chatbots
4. Contextual chatbots (AI chatbots)

These chatbots have a more sophisticated functionality and contextual awareness that require less training data than simple rule-based bots. They are built using powerful technologies such as natural language processing (NLP), natural language understanding (NLU), machine learning (ML) and AI. These technologies enable them to perform a task for the customer with minimal or no human assistance. Such chatbots make the conversations more fluid as they direct them according to customer intent and sentiment.

5. Hybrid chatbots

These chatbots are built with a perfect blend of the simplicity of flow-based chatbots and intelligence of AI-powered chatbots. They initiate a conversation with the customer, ask them about their problem, record customer data and then smoothly hand-off the lead to a human agent.

6. Voice-enabled chatbots

These chatbots hear, perceive and respond to your voice inputs via text, voice or both by using NLP combined with speech-to-text(self-developed or already existing platforms).

Click here to learn more about the different types of chatbots and how can you pick the right one for your business?

How does an AI bot work?

The basic functioning of an AI chatbot is as follows:

  1. User asks a question
  2. Chatbot applies AI algorithms to the customer’s query
  3. The chatbot then delivers a response to the consumer via text or voice
How does an AI bot work

It is during the second step that the chatbot employs NLP, AI and machine learning. These technologies help them interpret users’ queries and recognize verbal cues to better understand the user’s sentiment. The chatbot also uses previous customer data to understand their journey, infer feelings, such as frustration or anger to add more fluidity and personalization to the conversation.

As we discussed above, such chatbots become more intuitive with time. As they interact with customers, they develop more sensitivity and learn more effective ways to respond to queries. This results in more accuracy and enhanced customer experience. AI chatbots can also be integrated with an intranet of other applications to make the customer journey more seamless.

AI chatbot features

1. Human-like interactions

Businesses must customize their chatbots to master the art of having more human-like conversations as customers prefer the personality and naturalness of a human-like bot.

2. Conversational Maturity

Chatbots must be programmed in a way that they learn from previous interactions to provide better, more personalized support.

3. Emotional Intelligence

This is one of the advanced chatbot features that helps them decode human emotions and intentions. The sentiment analysis capability can enable your chatbot to understand the mood of your customer by sentence structures and verbal cues

4. Customer analytics

This feature enables chatbots to create repositories of customer data that you can leverage to understand your customers better and make profitable business decisions.

5. Conversational marketing

Chatbot functionality shouldn’t stay limited to customer support. With conversational marketing, chatbots are able to identify up-selling and cross-selling opportunities and push customers seamlessly through the sales funnel by providing them special offers.

6. Easy omnichannel deployment

In this hyper-connected world, you need to meet customers where they are. Yellow.ai’s chatbot building platform enables you to create a chatbot and deploy it to 35+ channels with a single click.

7. Data security

Chatbots aggregate data to perform efficiently, which is why it’s important to embed them with end-to-end encryption as well as other features like self-destructing messages and identity-authentication.

8. Robust API integrations

Chatbots must be easy to integrate with other business applications such as CRM, databases, etc to boost customer engagement.

9. Seamless hand-over

There can be situations where a customer insists on talking to a customer care representative. In such cases, a chatbot should be able to transfer the chat to the right customer care representative.

Benefits of using chatbots

1. Increased customer satisfaction

Chatbots can improve CSAT scores by upto 20% by resolving customer queries promptly and meeting their need for instant gratification. When customers get round-the-clock, real-time support on their preferred channels, it also improves their loyalty towards your brand.

2. Time saving

Digital transformation has caused a shift in consumer behavior. With more people preferring to shop online, the customer queries received by support teams are mounting up. To reduce their workload, chatbots can handle 80% of repetitive tasks, leaving the agents with more time to focus on complex issues.

3. Better lead generation and qualification

55% of businesses using chatbots have generated a greater volume of high-quality leads. Apart from lead generation, chatbots can also help you qualify leads by scoring them on the basis of KPIs, budget and relevance, so that you don’t spend valuable resources on dead-end leads.

4. Multiple business applications

Chatbot applications are not just limited to providing first-tier support for simple/repetitive customer queries. They also have multiple use-cases throughout different business functions like marketing, sales, HR and ITSM, which we’ll explore further in this article.

5. Increased sales and revenue

Chatbots increase sales by an average of 67%, according to business leaders. These intelligent virtual assistants identify opportunities for up-selling and cross-selling, make relevant recommendations, and help buyers throughout their journey, which can increase the customer spend by almost 20% to 40%.

6. Reduced OpEx

Chatbots can handle multiple customers simultaneously. They can also resolve more queries in less time than a human agent. Implementing intelligent chatbots allows businesses to increase their customer engagement without hiring more agents. This ultimately leads to cost reduction.

AI chatbot use cases across different business functions

Customer service
1. 24/7 support

51% of customers want businesses to be available 24/7. Round the clock support helps build brand loyalty and boosts engagement. It also shows customers that you truly care about them and prioritize their needs.

2. Booking and reservations

Implement a chatbot on your channel to guide the customers easily through the steps of making a reservation or even better, make the reservations for them.

3. Product recommendations

When chatbots recommend products to customers based on their interests and requirements, it can have a direct impact on conversions, engagement, and Average Order Value.

4. Processing returns and refunds

Chatbots can accelerate the process of returns and refunds by accepting returns, making sure the product is eligible for return and initiating a refund right from the chat interfa

AI chatbot use cases across different business functions
5. Order confirmation and tracking

Customers can be impatient when waiting for an order to arrive. To keep them engaged throughout the order fulfillment process, chatbots can send the customer’s order ids, shipping confirmation, tracking details and answer any questions that they may have.

6. Collecting customer feedback

Chatbots can help gather customer data by including interactive questions in the conversation flow to help you measure customer satisfaction and accordingly drive innovations and changes to your product or service.

7. Knowledge base

69% of people prefer chatting with a chatbot whenever they want answers to quick questions instead of waiting for a human being. Chatbots can act as the perfect knowledge base for customers to get instant answers to their questions.


1. Product promotions

Chatbots employ conversational marketing to promote products and services. They understand the customer intent by conversing with them and recommend the products that the customer is most likely to buy.

2. Funnel Marketing

Chatbots can be used as a marketing funnel automation tool to seamlessly engage with customers throughout different stages of awareness, consideration, conversion and retention.

3. Second-net lead gen strategy

Most companies use a lead generation form to gather customers data but only 2-5% customers are interested in filling the form. To make the lead generation process more interactive and fun for customers, companies must also apply the ‘second net’ strategy, wherein, a chatbot asks engaging MCQs from customers to collect their data.

AI chatbot use cases across different business functions
4. Up-selling and cross-selling

Augmenting up-sell, cross-sell and post-sell efforts by sending targeted messages to customers using chatbots that leverage business data with complete CRM integration.

5. Executing chat blasts

Similar to email drip campaigns but much more effective, chat blasts are a series of automated messages sent to a specific audience. It’s a great top-of-funnel lead generation that also enhances customer engagement.


1. Recruitment

Chatbots can facilitate the recruitment process by screening applicants, collecting information and ranking them based on qualifications, skills and experience. They can also answer simple questions about the job and the application process.

2. Onboarding

Minimize bottlenecks by using chatbots to connect new joiners with the team, collect paperwork and send them important information and documents about company policies.

3. Training employees

Training new employees has never been easier. Chatbots can structure all the training data in a question-answer format and ​​help employees study training materials in a more engaging way as well as test their knowledge using conversational assessments that provide real-time feedback.

4. Troubleshooting and ticket automation

While the HR and IT teams focus on tasks that demand more attention, chatbots can help employees self-resolve simple queries. For more complex problems, chatbots can help employees raise a support ticket.

5. Internal communications

Emails can get lost in the crowd and important information can go unnoticed. This is why it’s more efficient to send personalized alerts related to change in policies, holidays, rewards, etc. to employees using chatbots.

6. Applying leaves and checking balances

Now employees don’t have to follow a tedious process to apply for leaves or check their leave balance and chatbot can help them do that in just a few clicks.

AI chatbot use cases across different business functions

Delve in deeper about enterprise chatbots and how they impact both employee and customer experience. by clicking here.

Industry-wise applications of chatbots

1. Healthcare

Juniper Research forecasts that AI-powered chatbots will soon become the first touchpoint in the user’s journey with healthcare providers, as the number of chatbot interactions will exceed 2.8 billion annually by 2023. This is up from an estimated 21 million in 2018, an average annual growth of 167%. Chatbots in healthcare are being used for multiple tasks like booking appointments, refilling prescriptions, providing medical assistance to patients to monitor their health periodically and reminding them to take medicines on time.

2. BFSI sector

Use-cases of chatbots in the BFSI sector range from sending important reminders and alerts to customers to accepting payments, claim processing, policy renewals, reporting lost credit cards, and so much more. Chatbots in banking and finance also act as the perfect knowledge base for customers to get more information about different products and processes. To stay abreast of the latest CX trends in the BFSI sector, read this article.

Industry-wise applications of chatbots
3. Education

Chatbots in education not only facilitate students’ learning process but also act as the perfect teaching assistants. They help answer any queries that students have, be it related to the course, assignments, or deadlines, while the teachers focus on more important tasks. Chatbots can also help students revise before a test, book a one-to-one session with the teacher, conduct quizzes or send words of encouragement.

4. Retail & E-commerce

Chatbots are bringing about a revolution in how customers interact with brands online. With features such as 24/7 availability, omnichannel support, personalized recommendations, etc, retail chatbots have become the most-preferred brand communication channel. In fact, according to a Facebook survey, more than 50% of customers say they’re more likely to shop with a business that they can connect with via chat.

5. Travel & Tourism

Chatbots are also quite popular in the travel and tourism industry. They act as an intelligent virtual travel agent that offers personalized suggestions based on the user’s preferences, answers FAQs, and even makes reservations and flight bookings.

6. Gaming

Chatbots combined with AR or VR technology can transform the gaming experience for customers. They can also make way for more monetization opportunities, like increased subscriptions, plan upgrades and other content promotions as they engage with customers throughout their journey.

How to choose the best AI chatbot for your business?

As we have discovered, there are different types of chatbots that you can choose for your business. Here are a few tips that can help you choose the perfect chatbot for your business.

1. Define your target audience

Like your business, your chatbot too should have a target audience. You must create detailed user personas – name, appearance, function, career and private life (hobbies), behaviors, preferences and expectations. This enables you to get a better understanding of the kind of functionalities you want your chatbot to have.

2. Think about your objectives and value proposition

Once you understand the kind of users you wish to target, identify the specific tasks that you wish to automate with the help of your chatbot. You must ensure that your chatbot understands your customers’ preferences and caters to them accordingly.

3. Choose your channel of support

You can also narrow down the channels on which you wish to deploy your chatbot. You decide this by analyzing which channels your customers use the most. Although, it’s always a good idea to follow an omnichannel approach.

4. Evaluate features and functionalities

Each chatbot offers a unique set of features. In order to choose the best chatbot, you need to evaluate the essential features that you require your chatbot to have. For instance, if you want a chatbot to gather basic customer information and then hand-off the chat to a live rep, you can simply use a menu/button based chatbot. On the other hand, if you want the chatbot to automate more complex tasks and understand human intention, you would need an NLP chatbot.

5. Decide if you wish to build from scratch

Now comes the most important part, do you wish to build the chatbot from scratch? If so, you would be required to hire a team of competent developers and have a huge budget. Whereas, you can also use a no-code chatbot builder to help you build an economical chatbot in just a few minutes.

How to choose the best AI chatbot for your business

Why use Yellow.ai’s chatbot building platform?

Yellow.ai is a world’s leading CX automation and bot building platform, as recognized in the G2 Grid Report for Bot Platforms, Winter 2022, based on receiving a high customer satisfaction score and having a large market presence. With the help of our no-code chatbot builder, you can create a custom chatbot for your business that requires minimum training and uses our robust proprietary NLP framework to understand and cater to your specific customer requirements.

Here’s why our platform is trusted by more than a 1000 enterprises worldwide:

  1. Easy development with pre-built nodes
  2. Quick deployments to over 35+ channels
  3. Excellent speed to market value realization
  4. Easy integrations with over 100+ applications
  5. 24/7 real-time support to build a successful bot
  6. Competitive price point

With our bot building platform, you can get free trials so that you can try different chatbots before committing to one. Our team can also help you achieve 60% automation in just 30 days.

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