What is Chatbot? Why are Chatbots Important?

What is a chatbot and how it works

What is a chatbot? How does it help to accelerate your business yield? How can you build your own chatbot?

These are some common questions that arise when you think about deploying a chatbot to your business. According to Forbes, the chatbot market is forecasted to reach $1.25 billion by 2025.

In today’s time, where customers believe that the experience a company provides is as important as its products or services. That’s where AI chatbots come in. You can pretty much say that bots are a critical part of customer service automation.

Here is a list of components that will help to understand chatbots better.

  1. What is a chatbot?
  2. How do chatbots work? 
  3. Types of chatbots 
  4. Why chatbots are important for your business? 
  5. Chatbot use cases
  6. How to build your first chatbot?
  7. Successful chatbot examples
  8. Final thoughts: What is a chatbot and why it matters?

Let us comprehensively discuss how chatbots are strengthening their place in the digital marketing strategy.

What is a chatbot?

A chatbot can be defined as an AI-based computer program that simulates human conversations. They are also known as digital assistants that understand human capabilities. Bots interpret and process the user requests and give prompt relevant answers. 

Bots can through voice as well as text and can be deployed across websites, applications, and messaging channels such as Facebook Messenger, Twitter or Whatsapp. 

How do chatbots work? 

Chatbots work by analyzing and identifying the intent of the user’s request to extract relevant entities, which is the most important task of a chatbot. Once the analysis is done appropriate response is delivered to the user. The chatbots work by adopting three classification methods. 

Pattern matching

Bots utilize pattern matches to group the text and it produces an appropriate response from the clients. Artificial Intelligence Markup Language (AIML) is a standard structured model of these patterns. A bot is able to get the right answer in the related pattern. The bots react to anything relating it to the correlate patterns. 

Natural language understanding (NLU)

NLU is the ability of the chatbot to understand a human. It is the process of converting text into structured data for a machine to understand. NLU follows three specific concepts. They are entities, context, and expectations.

What is chatbots - NLU

  • Entities – It represents an idea to your chatbot. For example, it may be a refund system in your ecommerce chatbot.
  • Context – When a natural language understanding algorithm identifies the request and it has no historical backdrop of conversation, it will not be able to recall the request to give the response.
  • Expectations –  Bot must be able to fulfill the customer expectations when they make a request or ask a query customer says sends an inquiry. 

Natural language processing (NLP)

(NLP) Natural Language Processing bots are designed to convert the text or speech inputs of the user into structured data. The data is further used to choose a relevant answer. 

What is chatbot - NLP

Natural Language Processing (NLP) comprises of the below steps:

  • Tokenization The NLP filters set of words in the form of tokens.
  • Sentiment Analysis – The bot interprets the user responses to align with their emotions. 
  • Normalization It checks the typo errors that can alter the meaning of the user query.
  • Entity Recognition The bot looks for different categories of information required.
  • Dependency Parsing The chatbot searches for common phrases that what users want to convey.

Types of chatbots 

Chatbots process data to deliver quick responses to all kinds of users’ requests with pre-defined rules and AI based chatbots. There are two types of chatbots. 

Rule based chatbots

Rule based chatbots follow the predefined paths during conversations. At each step during the conversation, the user will need to pick from explicit options that determine the next step in the conversation. 

Key attributes:

  • These bots follow predetermined rules. So it becomes easy to use the bot for simpler scenarios.
  • Interactions with rule based chatbots are highly structured and are most applicable to customer support functions.
  • Rule based bots are ideally suitable for answering common queries suck as an inquiry about business hours, delivery status, or tracking details.

Conversational chatbots

Conversational chatbots are also referred to as virtual assistants or digital assistants. They are much more interactive and personalized than rule based chatbots. They are emerging as conversational banking trends as they converse with the users as in a way humans converse and communicate in real-life situations. 

Conversational communication skills of the chatbot technology empower them to deliver what customers are looking for.

Key attributes:

  • Conversational bots can understand the context and intent of complex conversations and try to provide more relevant answers.
  • AI bots apply predictive intelligence and sentiment analysis to understand customer emotions closely.
  • Machine learning bots learn from user behavior and provide more personalized conversations.

The video shows chatbots are helping business to improve customer experience:

Why chatbots are important for your business? 

A chatbot implementation plan can boost operational efficiency and bring cost savings to businesses while offering convenience and added services for customers. They allow companies to easily resolve many types of customer queries and issues while reducing the need for human interaction. 

According to Forbes, 80% of marketers plan to start using a chatbot in some way or another by 2021. This is a significant reason why brands are investing in improving the customer experience. 

Let’s find out the importance of adopting the chatbot strategy in your business and how chatbot benefits to win more customers or retain the existing ones.

  • Reduce customer waiting time – According to Chatbot Report, 21% of consumers see chatbots as the easiest way to contact a business. Chatbots are a smarter way to ensure that customers receive the immediate response that they are looking for without making them wait in a queue. 
  • 24×7 availability –  68% of customers switch to a competitor if they don’t think you care about them. Bots are always available to engage customers with immediate answers to the common questions asked by them. The top potential benefit of using chatbots is 24-hour customer service.
  • Better customer engagement – Conversational bots can engage customers round the clock by starting proactive conservation and offering personalized recommendations that boost customer experience.
  • Easy scalability with bots – Bots can be easily scalable during the peak business hours or and manage ‘n’ number of customer conversations without additional customer service costs. 
  • Save customer service costs –  Juniper Research estimates that chatbots will help businesses save more than $8 billion per year by 2022. Chatbots help businesses to save customer service costs of hiring more support agents that require additional costs such as salary, training and infrastructure costs.
  • Automate lead qualification & sales – You can automate your sales funnel with chatbots to prequalify leads and directing them to the right team for further nurturing. Being able to engage customers instantly increases the number of leads and conversion rates.
  • Reduce customer churn rate– Engaging your visitors is arguably the single most sure-fire way of reducing bounce rates and subsequently increasing conversions. With chatbots, you can boost your engagement strategy even further and actually keep visitors hooked. 

Chatbot use cases

Chatbots act as a catalyst to enhance performance when deployed across different business functions and industries. Here are the key use cases of how customers are getting the most out of conversational chatbots

What is chatbot - chatbot usecases

Source: Drift

Customer service

Business Insider reports say 67% of consumers worldwide used a chatbot for customer support. Customer service is one of the key business functions where chatbots have a great impact. With AI chatbots, businesses can save customer support costs and improve the key productivity metrics that enhance the customer service experience. 

Some key customer service use cases are as follows:

  • Website support – Today’s customers expect real time response. Businesses are adopting chatbot technology in order to deliver prompt customer engagement. 
  • IT helpdesk – Chatbots can help your IT helpdesk to boost your team productivity and drive efficiency.
  • In-app support – Having a bot to handle FAQs within applications enhances user engagement. It enables businesses to send notifications to keep customers updated. 


Lead generation is the most important function of every business. With chatbots, you can pre-qualify your leads and automate your sales funnel. You can do so by sending the leads right into your CRM or transfer to the sales reps to assist them further. 

The key use cases of sales bots are: 

  • Segment your audience –  Bots enables you to identify the product interests of visitors and customers. Based on that you can segment your target audience.
  • Pre Qualifying leads – Bots, programmed with a predefined sales questionnaire converts your website visitors into prospects. Then they are directed to the next level of the sales funnel. 
  • Bookings – Bots help for scheduling appointments for hospitality or health care, and also make bookings for personal services.


Bots can learn from user interaction and share relevant information regarding your brand, products, and services. Essentially, it’s able to up-sell and cross-sell in a personalized, conversational, and engaging way. 57% of businesses agree chatbots deliver a large return on investment (RoI) with minimal effort.

The bot marketing use cases for better customer engagement are:

  • Product recommendations – With bots, you can recommend products or combo offers based on the customer journey.
  • Start a proactive conversation – Bot can initiate proactive conversation while the customer is stuck within the product and guide towards the right direction.
  • Personalized notifications – You can learn your customer behavior and improve your conversations by personalizing it.

How to build your first chatbot?

Chatbots or virtual assistants help to automate main business functions like sales, support, and marketing. Here are the six main stages that will help you to create your first chatbot to deliver conversational support to your customers. 

  • Define your business objectives – You have to outline your business functions that need to be automated. What exactly will your chatbot do?
  • Choose the right channel to engage with your customers – Identify the channels your customers prefer to communicate with you across your website, mobile app, Facebook Messenger, Telegram or other messaging platforms.
  • Train your bot for giving the right response – You can train your bot with comprehensive FAQs depending upon your business needs. This will help the bot to deliver relevant answers to your customers or visitors.
  • Give your bot a voice and personality – You can enhance your bot personality by giving a name and picture that complements your brand message. 
  • Create a balanced approach – Most of the chatbot may not be that effective and customers look for chat support at some point. You can define at what particular stage, your customers can get a chance to connect with the human agent. 
  • Test, launch, and iterate – After you have defined your bot flow you can test to check if it is meeting the use case correctly or not. Once you launch your bot you have to measure bot performance and make the required iterations from time to time.

You can choose one of the two ways to build chatbots. They are:

#1. Use a chatbot platform

Chatbot platforms are boon for businesses that want to build their chatbot without much effort and time. Here are the criteria to select a bot platform.

  • Easy to use – A ready to use bot platform comprises of the predefined template and it makes it easy to build the bot as per your needs and deploy across multiple channels.
  • No coding – With zero coding, you can create a chatbot with minimal development with less effort & time and for better customer engagement. 
  • Analytics – Bot analytics help to measure your customer satisfaction, what are the successful and failed searches your bot answers. By measuring these chatbot metrics, you can identify the key queries your customers are asking and train your bot accordingly.
  • Live chat – You can look for a bot platform that supports both live chat and chatbot. Bots can handle the simpler queries and the complex ones can be transferred for human support.

#2. Build from scratch

It is advisable to build a bot completely from scratch if your business requirements are uniques or very complex. In such scenarios, it is highly likely that the ready to use bot platforms may not be able to delete the specific solution that your business needs.

Successful chatbot examples

No matter which business industry you belong to, there must be some business functions that can be automated to enhance your overall business growth. Here are two great examples of chatbots.

VainuBot for lead generation

When you merge chatbots and lead generation, your business can welcome a good number of leads. Filling up forms is a vital part of lead generation that can be automated with chatbots. The bot can ask relevant questions and engages them to provide information. Vainu, a well-known data analytics service built VainuBot for pre-qualifying leads. The bot asks questions to the visitors and qualifies them by providing few options and move to the next step. 

what is chatbot - Vainubot for lead generation - chatbot examples

Key learning – Businesses that aim at collecting lead information needed to create a chatbot to ask qualifying questions and respond with new questions based on the previous answers given by visitors.

HDFC Eva chatbot for customer service

The finance industry and chatbot make a great partnership. It benefits both the banks as well as their customers. Eva is India’s first AI enabled conversational banking chatbot. Eva uses the latest Natural Language Processing (NLP) to understand the user requests and provides relevant information in zero wait time.

what is chatbot - HDFC EVA chatbot

Key learning – Banks can design chatbots around core use cases such as claims or loan applications and also personalize it with a name for a better impact.

Final thoughts: What is a chatbot and why it matters?

Now, as you are aware of what is a chatbot and how important it is for your business, you will certainly agree that chatbots have drastically changed the way businesses interact with their customers. 

AI bots have become a vital part of a customer engagement strategy. Near to future bots will advance to enhance human capabilities and human agents to be more  innovative, in handling strategic activities.

In order to build a chatbot effective, you can follow the below guidelines

  • Identify your business requirements and build the bot across your key use case. Your bot should match your business requirements and boost customer satisfaction. You can measure the metric to understand the bot ROI. 
  • Use the right platform that covers the bot and live chat as a complete toolkit, so that your team can understand the customer journey better and have better control over the customer conversations.


Snigdha Patel
Author’s Bio

An avid reader, eclectic writer, blogger, and content writer by profession at REVE Chat, Snigdha Patel endeavors assiduously to understand complex support channels and provide information regarding them through comprehensive blog posts.

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