Conversational Messaging

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Conversational AI: The Complete Guide to Conversational Artificial Intelligence

Jenna Alburger

November 10, 2021

Conversational AI refers to technology (like chatbots, voice assistants, or conversational applications) that simulates a human conversation. Let’s take a look at some use cases, examples, and companies that are succeeding with conversational AI. 

conversational ai chatbot

What is conversational AI?

Conversational AI uses various technologies to simulate a natural conversation. These technologies help machines understand, process, and respond to human language.

There is a lot of overlap between different conversational technologies. Linguistics, computer science, and artificial intelligence (AI) all come together to form software capable of "understanding" human dialogue. 

The degree to which the software “understands” depends on which type (or types) of artificial intelligence it uses. While there are many different subfields of conversational AI, they can be grouped into two broad categories: 

  • Natural language processing (NLP)
  • Machine learning (ML)

Natural language processing

Natural language processing (NLP) broadly refers to how computers process and analyze large amounts of natural language data. Think of NLP as the “reading, writing, and understanding” part of conversational AI. 

  • Natural language processing (NLP) -- the computer reads language
  • Natural language understanding (NLU) -- the computer understands language
  • Natural Language Generation (NLG) -- the computer writes language

Machine Learning 

Machine learning solves problems based on large amounts of data. It connects the dots between many inputs and improves the response quality over time as it learns. 

With machine learning, conversational AI is contextual. It takes “understanding” and “interpreting” to the next level through statistical algorithms and data. 

What is a key differentiator of conversational AI? 

A key differentiator of conversational AI is that it “understands” more over time. Unlike basic conversational automation, it can improve over time through data and statistical algorithms. 

Because it can add context and understand patterns, it can facilitate more human-like dialogue compared to rule-based automation. 

How conversational AI works

Conversational AI works in three main steps. First, the computer reads the language, then it works to understand it, and lastly, it formulates a response. Here’s a bit more detail on how conversational AI works: 

  1. First, conversational AI uses Natural Language Processing (NLP) to break down requests into words and sentences that the computer can read. 
  2. Then, Natural Language Understanding (NLU) helps the computer analyze the input text, and uses that to determine the meaning behind the user's request. It does this by matching what's said to training data that corresponds to an 'intent'. 
  3. Then, the computer uses Natural Language Generation (NLG) to formulate a response. In this step, the computer uses structured data to create a narrative that answers the user’s intent. It combines the user intent with a structured hierarchy of conversational flows to present the information clearly. 

Chatbots vs. conversational AI

A chatbot is a computer program designed to simulate conversation with human users. Chatbots can use conversational AI or more simple automation, depending on the use case. 

To recap, some (but not all) chatbots use conversational AI. Chatbots are a broad category of conversational technology. There are AI chatbots, rule-based chatbots, menu/button-based chatbots, etc.

Side note: when people think of chatbots, they often think of basic chatbots that rely mostly on text inputs. For that reason, modern conversational solutions are being referred to as conversational apps

“Conversational apps” is a more accurate term to describe the kind of intuitive conversational experiences that are being built today. We’ll talk more about conversational apps later. 

Rule-based chatbots vs conversational AI

The real difference between chatbots and conversational AI can be seen when we compare rule-based chatbots to conversational AI. 

Rule-based chatbots 

Rule-based chatbots (or decision-tree bots) use a series of defined rules to guide conversations. They do this in anticipation of what a customer might ask, and how the chatbot should respond.

Rule-based chatbots can use very simple or complicated rules. They can't, however, answer any questions outside of the defined rules. These chatbots do not learn through interactions. Also, they only perform and work with the scenarios you train them for.

While rule-based bots have a less flexible conversational flow, these guard rails are also an advantage. You can better guarantee the experience they will deliver, whereas chatbots that use conversational AI can be a bit less predictable.

Some other advantages of rule-based chatbots are that they:

  • are generally faster to train (less expensive)
  • have clear guardrails that guide the user flow
  • carry out routine or predictable tasks with a high degree of certainty

Conversational AI

On the other hand, conversational AI uses natural language processing and machine learning to understand the context and intent of a question before formulating a response.

Conversational AI generates its own answers to more complicated questions using natural-language responses. The more you use and train conversational AI, the more it learns.

Some other advantages of conversational AI are that it: 

  • learns from information gathered
  • continuously improves as more data comes in
  • understands patterns of behavior
  • has a broader range of decision-making skills

Let’s compare conversational AI and rule-based chatbots side by side.

chatbots vs. conversational AI

Conversational apps

Now, let’s get back to conversational apps. Conversational applications are the next generation of chatbots. They combine the best conversational technology (like conversational AI and rule-based automation) with the best graphic user interfaces for an optimal user experience. 

Conversational apps tend to operate within messaging channels like WhatsApp, Messenger, and Telegram. That means that companies can build branded experiences inside of the messaging apps that their customers use every day. 

Again, “conversational apps” is a more appropriate term for modern-day chatbots. It takes into consideration how communication is evolving. Conversations today are increasingly visual and touch-based. We don’t just “chat” -- we swipe, tap, touch, press buttons, share pictures, locations, and more. 

conversational-ai-ui

Conversational apps are built for a messaging-first future. Soon, they will rival websites as the main interface between businesses and customers

Why does conversational AI matter now? 

The way businesses and customers communicate is changing. We’re in the middle of a paradigm shift and conversational AI is at the center of the conversation. 

Business messaging is the new normal 

Conversational AI is helping businesses adapt in a world where messaging is the new normal. People want to communicate with businesses in the same way they communicate with friends and family -- on messaging apps. 

That’s because: 

  • Messaging is asynchronous. People don’t have to wait on hold for an answer or wait more than 24 hours to get a response via email. Messaging allows them to multi-task and go about their routines at the same time.
  • People are already on messaging apps. In a world where there’s an app for everything, people are sick of being forced to download yet another app. They’d much prefer to use the channels they’re already on. 
  • The UI/UX of messaging apps is getting better every day. Facebook, Apple, Google are all in a race to build the most intuitive messenger app. They know that messaging apps are more than just a communication tool, they are the future of commerce, payments, and business in general.

Rising expectations are sparking a digital industrial revolution

Consumer behavior is changing customer expectations are rising. People now expect self-serve customer care, omnichannel experiences, and faster responses. And it’s impossible to meet these expectations without the help of conversational technology. 

Conversational AI is playing an important role in helping businesses scale conversations. Businesses can deliver the service customers expect without going on a hiring spree. 

Conversational AI market

Businesses recognize the importance of conversational technology. And conversational AI is not just for massive enterprises anymore. It’s more accessible and affordable, which expands possibilities and fuels competition. 

So it’s no surprise the conversational AI market is booming. The global conversational AI market size was valued at $5.78 billion in 2020 and is projected to reach $32.62 billion by 2030. The forecasted compound annual growth rate (CAGR) is 20.0% from 2021 to 2030.

Which industries are using conversational AI? 

Conversational AI in ecommerce

Conversational AI is making a significant impact on the ecommerce industry. It helps brands form customer relationships that last, hold conversations that have context, and ultimately sell more products.

Below are a few conversational AI use cases for ecommerce: 

  • cross-sell and upsell products
  • find specific products
  • make suggestions about the right sizing
  • place orders
  • help with returns
  • answer FAQs

Conversational AI in banking

In order to maintain a competitive edge, traditional banks must learn from fintechs, which owe their success to providing a simplified and intuitive customer experience. Conversational AI can be used in banking to facilitate transactions, help with account services, and more. 

Below are a few conversational AI use cases for banking: 

  • Help customers check their bank balances 
  • Send billing reminders and notifications 
  • Help find a nearby ATM
  • Assist with mobile deposits
  • Help customers apply for loans

Conversational AI in insurance

Like in banking, the insurance industry is also in the middle of a digitally-driven shake-up. Conversational AI represents a new means of distributing products and resolving claims. These shifts have ushered in an era of new products built on data and analytics.

Below are a few conversational AI use cases for insurance: 

  • Manage claims and renewals
  • Gather customer feedback and reviews
  • Customer awareness and education

Conversational AI in healthcare

Healthcare is an industry that is ripe for conversational AI. Conversational AI has the potential to make life easier for patients, doctors, nurses, and other hospital staff in a number of ways. 

Below are a few conversational AI use cases for the healthcare industry: 

  • Check symptoms
  • Answer common health questions
  • Book appointments
  • Check up on patients
  • Send medication reminders
  • Escalate emergency cases

Companies using conversational AI

1-800-Flowers

1-800-flowers conversational ai

Online floral dealer 1-800-Flowers uses IBM’s Watson AI system to deliver its “digital concierge”—an AI customer service bot that takes customer orders through their website and mobile app.


Titled “GWYN” (“Gifts When You Need”), this chatbot uses natural language understanding and natural language generation to take customer orders in a more intuitive way than a traditional online order form. 

Instead of a structured process of filling out a form on a website, people can type into GWYN, and the conversational AI will guide the customer through the process of selecting and buying a gift. 


Babylon

Babylon health chatbot

To make healthcare more affordable, Babylon uses AI and technology to help its doctors and nurses complete administrative tasks more efficiently, and gain insights to make more informed decisions. 

With its symptom checker, Babylon is helping people avoid the confusion and anxiety that comes with researching health symptoms online. Through conversational AI, it can analyze your symptoms, potential causes, and possible next steps. It can identify most issues that primary care doctors tend to see.

Lemonade

lemonade insurance chatbot

By now, you've heard of Lemonade, an insurtech selling home, renters, and now pet insurance. The company found a way to connect with young customers and make buying insurance quicker and simpler -- mostly through conversational AI. 

In 2017, Lemonade showed us how many steps in the insurance process were ripe for conversational AI with its insurance chatbot, Jim. One claim that Jim processed took only a few minutes, and the claim was actually paid within three seconds of submitting it.

What makes Lemonade and other insurtechs disruptive is the commitment to adding value and increasing efficiency. “You see, A.I. Jim works at the speed of light, 24/7, but costs only a few pennies in electricity bills. It’s one of those rare cases where the best service comes with the best price tag,” says Daniel Schreiber, Co-founder of Lemonade. 

Conversational AI platforms

The conversational technology you’ll need will depend on your industry and potential use cases. You’ll need a conversational strategy that can grow with you as the demands of customers change and the needs of your different business units evolve. 

At Hubtype, we work with our clients to recommend the right level of automation for their business goals and objectives. While we integrate with conversational AI platforms like Dialogueflow and IBM Watson, we find that most of our clients succeed with rule-based automation and visual user flows.

carousel UI chatbot

Our conversational applications go beyond simple carousels and buttons, they use media-rich components like floating elements, web views, and more. Using these graphical elements enriches the experience for the user while improving the capacity for automation.

payment integration with whatsapp


Our conversational applications also integrate with your tech stack, aggregate messaging channels, and deliver critical insights to help you continuously improve. 

Learn more about our conversational platform.

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