AI for Small Business: Applications, Benefits, and Risks

Artificial intelligence (AI) adoption is accelerating across industries, with the market for AI technologies projected to soar past $1 trillion by 2031. As large enterprises use AI to gain efficiency and improve personalization, smaller businesses need to act fast to stay competitive. 

The good news is small businesses now have unprecedented access to AI tools, and they’re easier to use than ever. Read on to explore how your small business can use AI to grow sales, improve business operations, and delight your customers.

What is AI in small business?

In a small-business context, artificial intelligence (AI) is when a machine (software or hardware) performs business tasks that typically require human intelligence. AI comes in many forms, including machine learning (ML), natural language processing (NLP), computer vision, and robotics. Through algorithms and data, an AI system can analyze vast amounts of information and derive insights or make predictions. Advanced AI systems even learn from their mistakes and reprogram themselves, much as a human might do.

Small businesses can apply AI to almost any aspect of their business. Marketing AI applications include workflows like writing product or website copy, while finance applications include making data-driven sales forecasts or automating aspects of bookkeeping, like classifying receipts.

Steven Gmelin, VP of digital sales and strategy at ALOHA, has some simple advice for small businesses getting into AI: “Automate what can be automated. Don’t be afraid to leverage generative AI tools as an aide to get things done more efficiently and effectively. Remember that your team’s time is valuable; focus on what you’re uniquely qualified to do and outsource the rest.”

Almost half of small businesses in the US are already taking Steven’s advice, and 40% of small businesses said in 2024 that they were using generative AI. This was nearly double the level from the previous year.

AI uses for small businesses

• Customer service
• Data analytics
• Product development
• Marketing
• Predictive analytics
• Business operations
• Sales support

AI technology can be applied to nearly every aspect of your small retail business. From front-of-house customer interactions to behind-the-scenes inventory management, smart tools can save time and discover useful insights from your business data.

Chris Wlezien, founder and product innovation strategist at Eureka Partners, says that AI offers value to all online sellers. “All ecommerce businesses can benefit from integrating AI in a variety of ways, from improving the efficiency of daily tasks with LLMs (large language models) or other specific tools, to improved and personalized product recommendations, or creating content and copy for marketing collateral.” 

Here are some of the top ways to use AI for small businesses: 

Customer service

There are numerous ways that AI tools can benefit customer service:

• Reduce response and handling times by leveraging AI chatbots to respond to customer queries 24/7 within seconds.

• Create more self-service customer service content (like FAQs and knowledge center articles) with AI copywriting tools.

• Predict customer needs and behaviors to provide proactive support and prevent churn. 

“Most customer service inquiries are straightforward, making it possible to use automation, self-service tools, generative AI-assisted responses, and even sometimes outsource to a trusted partner who values our brand and customer experience as much as we do. Of course, this doesn’t solve 100% of CX inquiries, but it gets them the majority of the way there, which has been huge for our team,” says Steven Gmelin. 

For example, AI-powered customer service tools like Ada and Forethought allow small retailers to offer prompt, personalized support around the clock. Their AI chatbots can answer common questions (such as “Where’s my order?”), recommend products, and process simple returns without human intervention. It’s no wonder that roughly one in four small businesses plan to use AI to automate customer service tasks in the near future.

Data analytics

Traditionally, small retailers have had to rely on their intuition or conduct time-consuming analytics to understand market trends and customer preferences. Artificial intelligence changes that by processing data faster than a human can. AI-driven analytics platforms like ThoughtSpot and Qlik gather and analyze data from sales records, social media platforms, web traffic, and even competitor behavior to reveal patterns. 

For instance, an AI tool might analyze your point-of-sale data and discover that certain products sell better on weekends or that a style of shoe is trending with your target demographic based on social media posts. By letting AI sift through their data, small businesses gain clear, data-backed insights about what to sell, how to price their products and services, and how to better connect with their audience. 

Despite these benefits, adoption is still in early stages; as of 2023 only about 11% of small-business owners used AI for data analysis to inform decisions. This means there’s plenty of opportunities for savvy businesses to get ahead. Consider leveraging AI for these types of analysis:

• Competitive analysis. AI-powered tools can track competitor pricing, product launches, and customer sentiment in real time, giving you actionable intelligence.

• Customer insights. Machine learning can segment your customers and predict their preferences by analyzing purchase history and online behavior.

• Trend spotting. AI systems digest vast amounts of social media posts and search associated data to identify emerging trends in your niche (e.g., a spike in searches for “sustainable fashion backpacks”), so you can capitalize early and gain a competitive advantage.

Product development

Developing new products or expanding your product offerings is another area where AI can lend a hand. “Ecommerce brands that create their own products can benefit the most by using AI tools to rapidly develop new products—from creating research stimuli and generating product requirements all the way to producing product renders and concepts,” says Chris. 

AI design tools or generative image tools like Midjourney and Adobe Firefly, for example, can help you create product prototypes. 

“For our clients, we have seen initial concept development cycles reduced from weeks to days because we can generate high-quality, detailed concepts in minutes using AI image generation tools in the hands of experienced designers,” Chris says. “These detailed and rapid concepts can align teams, making decisions easier and aid in getting customer research and buy-in earlier than ever.” 

Marketing

Marketing is often one of the most time-intensive tasks for a small business—and one of the most ripe for AI assistance. From writing social posts to optimizing ad targeting, AI tools like Shopify Magic, Jasper, Shown, and Albert can automate and improve many marketing activities. Small businesses are already taking advantage of these handy tools; 52% of small businesses using artificial intelligence apply it to social media, 44% use it for content creation, and 41% use it for email marketing campaigns. By automating repetitive tasks and improving targeting, AI can help you get more impact from modest marketing budgets. 

Predictive analytics 

One of AI’s superpowers is making predictions from patterns, and small retailers can harness this for smarter planning. Predictive analytics involves using artificial intelligence to analyze your historical business data and current trends to forecast future outcomes. In a retail context, this can help answer questions like: 

• What will my top-selling items be next month? 

• How many customers can I expect each day? 

• Which products are at risk of running out of stock? 

The more data you have, the better. But even with limited business data, modern AI tools like Dataiku can generate useful forecasts to help your business plan more effectively. For example, with a few months of sales data, an AI system might predict seasonal demand shifts or flag that umbrella sales spike whenever weekly weather forecasts predict rain. 

For a small business, these trend predictions can be invaluable. A brick-and-mortar store could use a simple AI forecasting tool to predict daily foot traffic and adjust staffing levels accordingly. An online electronics seller might forecast which gadget will be a holiday bestseller and stock up in advance.

Business operations 

Running a retail business involves countless operational tasks that AI can help with. Inventory management is a prime example—AI systems like Stock Perfect automatically monitor stock levels, make purchase order suggestions, and monitor your profit margins. By analyzing sales velocity and supplier lead times, these artificial intelligence tools ensure you’re never caught with empty shelves (or excess stock tying up capital). 

Returns and customer feedback management is another operational area where AI can streamline workflows. Smaller retailers often struggle with efficient return processing. AI tools like EcoReturns can help by automating return authorization, assessing the reasons for returns, and minimizing fraud. By introducing AI into your day-to-day operations and business processes, you can run a tighter ship and reduce operational costs.

Sales support

As of 2024, 44% of entrepreneurs use generative AI to help boost sales. One popular tool is an artificial intelligence sales chatbot, which differs from a customer service bot in that it actively helps customers shop. For example, on an ecommerce website, a chatbot might pop up to ask if the visitor needs help and then recommend products based on their browsing. In a physical store, AI-driven mobile apps or kiosks can perform a similar role.

Upselling and cross-selling tools powered by AI, like ReConvert Upsell & Cross Sell, have also become increasingly accessible to small businesses to help improve the customer experience while driving sales. Much like Amazon’s “Customers who bought this also bought …” suggestions, AI recommendation engines in your online store can suggest complementary products, ultimately turning a single-item sale into a larger purchase or bundle.

Benefits of adopting AI for small businesses

• Increased productivity
• Cost savings
• Reduced human error

Here are some potential benefits of adopting AI:

Increased productivity

AI lets small businesses accomplish more with their existing resources. Tasks that used to eat up hours can be handled in minutes by an algorithm or automation. For example, instead of manually compiling sales reports, an AI system like ChatGPT or Claude can generate them and highlight key points. Customer inquiries that would have interrupted your team’s work can be answered by a bot, improving customer service while boosting productivity. In one survey, 60% of small businesses using AI or automation said it saved time and allowed them to work more efficiently. 

For a small business, those saved hours are invaluable—and can be reinvested in strategic work like sourcing new products or improving the store layout. Whether it’s automating nightly bookkeeping or having AI draft your social media calendar, you and your team can focus on higher-level tasks that require human creativity and judgment.

Cost savings

Time is money, and automation can lower costs by handling tasks that might otherwise require additional hires or overtime hours. There are also indirect savings—fewer errors (thanks to AI) can mean less money spent fixing mistakes or appeasing unhappy customers.

With predictive capabilities, AI can create other savings, too. For instance, if an AI tool automates inventory ordering, you might save on last-minute shipping fees or emergency stock purchases. With powerful data analytics, AI might help you optimize your ad spend and improve your return on ad spend (ROAS). 

Many AI tools come in affordable subscription models, meaning you don’t need a huge budget to implement them. There are also a number of free AI tools on the market, or paid tools that have free tiers, so you can upgrade if your needs increase. 

Reduced human error

A missed email, a wrong number in the books, or forgetting to reorder a top seller can all hurt your brand reputation and revenue. AI can reduce such slip-ups. For example, an AI accounting assistant won’t transpose digits on an invoice, and an inventory algorithm won’t forget to alert you when stock is low. 

Of course, AI isn’t infallible—it does what it’s programmed to do and generative AI can experience AI hallucination—but it’s not prone to fatigue or distraction. This consistency is a huge plus. Think of an AI quality control system that flags anomalies in sales transactions that a human might overlook, or an ecommerce AI that automatically removes duplicate or spam customer reviews. By catching mistakes or preventing them outright, AI can help safeguard small businesses from human errors in tasks like data entry.

Risks of AI for small businesses

• Security
• Intellectual property
• Ethical concerns

While AI offers many benefits, it’s not without risks. Implementing AI responsibly means understanding potential downsides and taking steps to mitigate risks. But that shouldn’t stop your business from exploring these tools. 

“Allow yourself the freedom and flexibility to try a variety of tools regularly, and give yourself the space to learn them and even sometimes fail,” says Chris Wlezein. “AI tools are being created so rapidly and have so much power but also many shortcomings, which are hard to [anticipate], so experimenting and allowing yourself to be curious and try a variety of tools is really the foundation to being successful in this rapidly growing landscape.”

Security

Any tool that handles sensitive data or automates tasks comes with security risks, and AI is no different. Small businesses must ensure that customer data (like purchase history or personal details) and other proprietary information fed into AI systems is protected by strong usage terms and security practices.

If you’re feeding proprietary data into an AI platform (like your sales figures or customer list), do you know how secure it is and who has access to it? Reputable platforms won’t use your data beyond providing the service, and they’ll protect it from data breaches with best-in-class security practices, but check the fine print, including: 

• Encryption practices

• API security practices

• Data access policies

• Data handling procedures 

Intellectual property 

AI introduces some gray areas when it comes to intellectual property (IP) and legal rights. For example, if you use generative AI to create product designs or marketing content, who owns the output—you or the tool’s creator? Typically, most services allow you to own what the AI creates for you, but it’s important to read the fine print. 

Using generative AI can also create copyright infringement risks. AI copywriting tools can output text that closely resembles someone else’s work, risking plagiarism. Or an AI could scrape imagery from the web to produce visuals that later turn out to infringe on someone else’s trademark. To mitigate IP risks, be cautious when it comes to the content AI produces—treat it as a first draft and run originality checks for texts and images.

Ethical concerns

AI’s capabilities raise ethical questions that small-business owners should consider. For instance, using AI to profile customers for targeted ads needs to be done carefully to avoid bias, privacy intrusion, or accidental violations of regulations such as Europe’s General Data Protection Regulation (GDPR). 

Customer trust is also at stake; most consumers are still uneasy about how AI is used in business. About 77% of American adults say they don’t trust businesses to use AI responsibly, which means transparency is crucial. If you’re using AI in a way that directly interacts with customers, it can be wise to let them know and provide an option to reach a human if desired. 

Always keep a human in charge of oversight: AI should assist, not fully replace, humans in your business. By being transparent, testing AI systems for biases, and establishing clear guidelines for AI usage, small businesses can avoid ethical pitfalls.