What is a chatbot? + How they work

According to our AI-powered CX Trends Report 2024, customer interactions are anticipated to increase fivefold within three years. Meanwhile, two-thirds of customer experience (CX) leaders are expecting to manage leaner teams. These teams plan to invest in chatbots to deliver customer service at all hours of the day—no matter what day of the week it is—and improve team productivity.

Chatbots are the digital butlers of the modern world. While they may not serve cocktails on silver trays, they offer invaluable service to all types of businesses—especially those prioritizing customer experience and employee service. Plus, chatbots and conversational AI can help companies offer accurate, always-on support without breaking the bank.

Discover what chatbots are, how they work and have evolved, their value, use cases, benefits, and best practices, and the impact of the next generation of bots—known as AI agents—in our guide.

More in this guide:

• Types of chatbots
• How do chatbots work?
• The value of chatbots
• The most common chatbot use cases
• What are the benefits of chatbots?
• AI and chatbots
• The challenges of chatbots
• How have chatbots evolved?
• Chatbot best practices
• How to create a chatbot
• Frequently asked questions
  
• Stay ahead in CX with AI agents

Types of chatbots

The different types of chatbots vary in complexity and sophistication. The three main types of chatbots, which are all categorized as natural language processing (NLP) bots but are differentiated by their purpose, programming, and training, are:

• Rule-based chatbots: Rule-based chatbots follow pre-determined rules. These chatbots use automation to match inputs with outputs and are less complex than other types of chatbots.
• Generative AI chatbots: Generative AI chatbots are capable of understanding context and creating new, dynamic responses that simulate natural human language. Unfortunately, these AI-powered chatbots can hallucinate or present untrue ideas as fact, so it’s necessary to adopt a hybrid approach and upgrade to AI agents (which use both generative AI and conversation design) to give you more control over your customer interactions and allow your bot to fully resolve more complicated queries.
• AI agents: Trained on billions of real interactions to understand the nuances of CX, AI agents are the next generation of AI-powered bots. AI agents are purpose-built for CX and seamlessly integrate into backend systems to resolve even the most complex issues without human intervention 24/7.

Customer expectations, especially those about CX and service, are evolving. To meet these changing wants and needs, businesses must invest in autonomous bot support and AI agents, otherwise they risk falling behind.

How do chatbots work?

Chatbots use pre-defined conversation flows, natural language processing (NLP), and/or machine learning (ML) to answer users’ questions and guide customers through different scenarios in real time. For example, businesses can use generative AI chatbots to answer FAQs, enterprise chatbots to collect customer data, service desk chatbots to maintain knowledge management, and AI agents to answer complex questions about refunds, exchanges, and other nuanced situations.

When it comes to CX, chatbots work in unique ways. They can connect to a company’s knowledge base, allowing them to quickly and accurately answer FAQs or provide customers with detailed articles about specific inquiries.

AI agents take the ways a typical chatbot works a step further. Because these chatbots are pre-trained on billions of CX interactions, they can autonomously resolve complex inquiries and learn as they go to provide better support. AI agents can also anticipate customer needs, enabling them to provide personalized recommendations or proactively message users about a problem. Plus, they integrate into backend systems to seamlessly interact with customer database software and APIs to deliver hyper-personalized support.

The value of chatbots

Chatbots were the starting point toward a revolutionized future. They began the process of automating customer support, opening the door for AI agents to elevate and streamline service. Today, AI agents are completely changing how companies interact with customers and employees by prioritizing personalized customer service and improving business processes.

It’s important to note that not all chatbots are created equal—or provide the same value. Poor chatbot experiences from clunky or uncustomized bots won’t improve service or automize support, especially as customer expectations grow sky-high. However, AI agents consistently deliver seamless, automated support in any language at any time.

Investing in AI agents enables your business to automate personalization, accurately and consistently respond to customer inquiries, and provide 24/7 support. By ensuring customers and employees get the help they need (when they need it), these bots set new benchmarks for customer care and service excellence. Plus, these bots reduce the mundane work required of human agents, allowing them to focus on relationship-driven interactions and other more valuable tasks.

The most common chatbot use cases

Many businesses use chatbots to improve their customer service and foster customer loyalty. Here are some of the other most common ways companies leverage chatbot technology:

• Data collection: Bots enable teams to collect and analyze vast amounts of data, track AI analytics, and leverage actionable insights to optimize chatbot performance, update products, improve services, and direct complex questions to human agents.
• Sales promotion: Welcome new visitors, collect lead information, and pass the details to sales teams with chatbots for sales.
• FAQ responses: Basic chatbots can answer frequently asked questions, drawing responses from a business’ knowledge base.
• Password resets: Customers and employees needing to reset passwords can ask for directions or help from chatbots and receive instant service at all times of the day.

As AI agents are more sophisticated than other types of chatbots, we’ve included some of the more common AI agent use cases below:

• Autonomous customer service: Intelligent chatbots for customer service—like AI agents—can understand and fully resolve even the most sophisticated customer issues.
• Automated employee service: Chatbots can help AI-powered employee service solutions streamline HR management, answer employee inquiries, and provide instant internal customer service.
• Personalized recommendations: Chatbots can delight customers with personalization, making recommendations based on past behaviors, expectations, and needs.
• Appointment scheduling: AI-powered bots can schedule customer appointments and answer questions about scheduling updates.
• Omnichannel customer service: Chatbots can provide multilingual, omnichannel support around the clock.
• Order and inventory tracking: Bots seamlessly integrate with sales tracking software to tell customers what products are in stock, provide shipping estimates, give updates post-purchase on where an order is, and issue refunds or exchanges.

Chatbots today do so much more than simply answer questions: they anticipate needs, drive engagement, and create customer experiences that inspire loyalty and improve retention.

What are the benefits of chatbots?

With the rise of AI agents, chatbot benefits are much greater now than they were in the past. Here are some of the key benefits of AI agents becoming easily accessible:

• Always-on support: Customers today expect immediate help. Deploying a chatbot across preferred channels ensures customers get 24/7 support.
• Enhanced growth opportunities: Use chatbots to serve more customers at once and help agents do more with less. As a result, teams can scale quickly and assist more customers consistently.
• Increased conversions: Customer service bots can boost
  lead conversions, nudging consumers to take action by presenting them with image carousels, forms, picklists, and other messaging elements.
• Improved personalization: Chatbots connect with business systems to help agents capture customer details like name, issue type, and contact information. This enables personalization at any point during an interaction.
• Elevated roles: As chatbots automate simple tasks and handle complex ones, agent and manager roles shift toward AI overseers. Plus, chatbots enable agents to focus time and energy on nuanced interactions.

• Refined response consistency: Chatbots deliver identical or similar responses to related inquiries, ensuring all customers receive the same level of care. Bots also follow brand requirements and deliver answers in a consistent tone and voice.

• Boosted customer engagement: By providing quick, personalized, and round-the-clock support, chatbots encourage customer engagement, deeper connections, and increased retention.
• Reduced cost: Automating routine customer inquiries and identifying where you can make operational improvements allows chatbots to resolve FAQs and make customer service more efficient.
• Enhanced customer satisfaction: Chatbots provide immediate, accessible support, reducing wait times and frustration. Plus, their ability to personalize responses and understand customer inquiries improves CX interactions.

Whether you’re looking to remove repetitive customer queries from your agents’ plates or extend your support hours, implementing a chatbot can help take your CX and employee service to the next level.

AI and chatbots

Artificial intelligence is the driving force behind the rapid evolution of chatbots. Once limited to simple scripted interactions, AI-powered chatbots use NLP and machine learning advancements to hold conversations that don’t need scripts. With the emergence of generative AI, chatbots are becoming more complex (and more capable), effectively changing the chatbot game.

AI empowers chatbots in various ways, but solutions like Zendesk AI are rapidly elevating how customer experience bots handle interactions, respond to complex queries, adapt behavior over time, and deliver more accurate and relevant information. With AI that’s purpose-built for CX rather than generalized artificial intelligence, Zendesk AI Agents can account for nuances in interactions that are pivotal to providing exceptional customer service.

Additionally, you no longer have to choose between cost and quality when investing in the best AI chatbots. Technical expertise isn’t required to implement Zendesk AI and our AI Agents, making our solution cost-effective and easy to use. As we strive toward a future where a majority of all customer interactions will be automated—and 100 percent of interactions will utilize AI in some form, according to our AI-powered CX Trends Report—the abilities of bots must improve. Plus, as customer interactions increase, investing in AI and chatbots that can meet expectations and enable teams to be more efficient is essential to future success.

The challenges of chatbots

With every new technology, there are challenges to consider. Below, we’ve listed some of the most common challenges associated with chatbots—and ways to mitigate them with Zendesk AI.

• Hallucinations: Hallucinations occur when AI recognizes a pattern but doesn’t truly understand the information, causing it to generate and present responses that are factually incorrect or completely fabricated. Invest in an AI provider that can set parameters and have AI agents designed to detect customer sentiment and produce accurate answers for complex interactions.
• Security and privacy: Unregulated and poorly managed chatbots can be a security risk. With Zendesk, Advanced Customer Data Privacy and Protection is at your fingertips, so you can automate service while prioritizing privacy and security.
• Implementation timelines: Deploying a bot can take time and resources. With Zendesk, you can take your AI agents’ deployment timeline from weeks to days—no technical skills required.
• Training: Biased, outdated, and time-consuming training can make using chatbots problematic and difficult. However, Zendesk AI agents are pre-trained on billions of customer interactions and real conversation data to automatically detect customer intent and respond as human agents would.
• Multilingual conversation flows: You need to reach customers where they are in the language that’s most comfortable for them. With a solution that interacts in more than 100 languages out of the box, you can easily serve customers in multiple languages.
• Contextualized responses: As basic and rule-based bots are unable to respond outside of scripted conversations, their responses can miss the point of a customer’s inquiry. With Zendesk AI Agents, you can automatically deliver contextualized responses based on interaction history and customer feedback.

Despite their limits, chatbots are here to stay, so choose the next generation of AI-powered chatbots to provide high-quality service every time.

How have chatbots evolved?

In the 1960s, a computer scientist at MIT was credited for creating Eliza, the first chatbot. Since the creation of this simple bot, chatbots have significantly evolved—and continue to create seamless conversational experiences.

Discover the evolution of chatbots below:

• 1966 to 2009: The first generation of chatbots—including Eliza and A.L.I.C.E.—were created and later improved. These basic chatbots used recognition capabilities to produce scripted responses for specific keywords. These bots built the foundation for modern chatbots.
• 2010 to 2020: The second generation of conversational chatbots was born. These bots use advanced NLP and ML processing to understand human language and process voice commands.
• 2021 to 2023: Generative AI bots like ChatGPT and Gemini are trained on massive data sets. By using transformers and large language models, these bots generate brand-new, contextually relevant outputs to all types of inputs.
• Present: Chatbots across the board have become far more sophisticated and specialized in their functionality. Today’s bots leverage advanced AI capabilities to deliver more nuanced, personalized interactions. This shift has allowed them to become more targeted in their use cases, designed to handle specific tasks with greater precision and efficiency. For example, in customer experience, the next generation of chatbots—AI agents—can autonomously solve issues of any complexity. AI agents are trained on billions of interactions, enabling them to provide personalized, accurate responses. These bots are purpose-built for CX and can summarize calls, draft emails, converse with customers, and more.

Modern chatbots are designed to connect with customers without the need for human interference. With the increase in mobile device use and unique messaging channels, utilizing customer service chatbot software has become more popular.

Using advanced AI technology, chatbots have evolved from answering a limited number of common questions to understanding customer sentiment and answering complex queries in a brand’s tone of voice.

Chatbot best practices

If you’re ready to improve your digital customer service experience by investing in a chatbot, consider these best practices:

• Disclose when you’re using AI: Inform customers when they’re conversing with a chatbot and when you use AI to draw from your knowledge base to improve AI transparency, set expectations, and promote acceptance and customer trust.
• Choose the right software for you. Invest in a custom-made solution that allows you to make your AI agent an extension of your brand with a specific chatbot persona rather than a clunky tool.
• Start quickly by connecting to your knowledge base. Provide instant and accurate responses to customers.
• Integrate with your backend systems to drive automation. Seamlessly connect with any business system to collect, organize, and analyze customer data to deliver accurate and contextual responses.
• Use a hybrid approach to prioritize personalization. Identify topics that require more guidance and build customizable and controllable conversation flows that deliver step-by-step resolutions.
• Follow quality assurance principles to catch blind spots. Fine-tune and optimize support processes by automating QA to track areas for improvement and regulate compliance.
• Collect and use customer insights. Expand new use cases, languages, channels, and markets based on feedback gathered from customer surveys and Voice of the Customer findings.
• Keep your tone of voice on brand. Give your chatbot guiding principles and expectations, including words and phrases to avoid. Plus, don’t forget to choose adaptable chatbot personas and an appropriate yet creative chatbot name.

There’s no one-size-fits-all approach to using a chatbot, but these best practices serve as general guidelines about where to start. Create or choose a chatbot that works for you and helps you meet your business goals, and put your best foot forward when working toward 80 percent automation rates and exceptional service.

How to create a chatbot

Businesses most commonly create chatbots using chatbot software. However, not all chatbot software is created equal. While some businesses may require complex software and development teams, Zendesk AI Agents work out of the box, so your team can begin offering meaningful, consistent support on day one without hiring a team of developers.

By investing in an AI-powered solution like Zendesk, companies can invest in CX-focused chatbots and increase their support capacity overnight by deploying AI agents. Plus, it’s necessary to consider these main AI chatbot features:

• Quick, out-of-the-box implementation

• AI transparency

• Backend integration

• Omnichannel and multilingual support

• Ease of use

With the expectation that AI will soon be essential to providing all types of customer experiences, choosing CX-forward chatbot software is vital.

Frequently asked questions

Stay ahead in CX with AI agents

According to the Zendesk Customer Experience Trends Report 2024, 72 percent of CX leaders agree chatbots should be an intelligent extension of a brand’s identity rather than a simple machine to get tasks done. As technology rapidly evolves, chatbots are also transforming into digital agents with the capacity (and capabilities) to do more.

Invest in AI agents and cutting-edge technology, like Zendesk AI, to prioritize CX and stay ahead of its trends. Zendesk is driving the future of customer service chatbots, allowing businesses to personalize conversations, resolve complex inquiries autonomously, and help human agents focus on more nuanced customer needs.

Offer 24/7 and personalized support anytime, anywhere, by investing in Zendesk AI agents today.