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How Does VoIP Work? The 2020 Guide to VoIP Phone Systems

By now, you’ve heard about VoIP, which is short for Voice over Internet Protocol. Originally launched on the internet in 1995, it’s an understatement to say that VoIP has changed the way we communicate.

In this guide, we’ll explain how VoIP phone systems work, including all the ins and outs about making phone calls over the internet.

Even if you consider yourself a beginner or a seasoned business leader, you’ll learn everything you need to know about internet phone service.

What is VoIP?

Voice over Internet Protocol refers to the standards that facilitate voice-based phone calls using an internet connection instead of a local telephone company.

Voice over IP converts your voice into a digital signal, compresses it, and sends it over the internet. A VoIP service provider sets up the call between all participants. On the receiving end, the digital data is then uncompressed into the sound that you hear through your handset or speakerphone.

People opt for VoIP because they can make phone calls without any telephone service, which saves them on long-distance charges. If you have internet access, you don’t need to run any extra copper wires. This lets employees work from home or telecommute to the office as well.

To call someone using VoIP, you need a SIP-compatible desk phone or a VoIP calling app, which means it is assigned an IP address so that calls can be made from your network. Unlike landline phones, they are capable of high-definition (HD) phone calls.

However, you’re likely a little curious about the basics of VoIP. Let’s explain.

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How Does a VoIP Phone System Work?

A VoIP phone system is a technology to make phone calls through your internet connection instead of a regular landline or a mobile network. A VoIP system converts analog voice signals into digital signals over your broadband connection. A VoIP server is used to connect calls to other telephone networks.

As long as you have a high-speed internet connection, which includes a router and modem, you are ready to use a VoIP.

A typical VoIP configuration involves a desk phone and a SIP server, which is typically a VoIP service provider. It works even better than your traditional landline phone because it offers many more features than what analog phone service could ever provide.

Since VoIP runs over the internet, your data is stored securely in the cloud. You can manage the VoIP system through an online dashboard. This dashboard allows users to adjust contacts, business phone numbers, call forwarding, and add new phone numbers.

You probably already pay for internet service regardless of which phone system you use. Cable and fiber broadband makes it possible to use internet phone service to cut out the costly telephone company. It’s also much easier to add new features that essential to your business needs.

Related: 3 Easy Steps to Get a Business Phone Number

Why Do Businesses use VoIP?

For a business application, VoIP is an ideal solution to provide employees reliable phone service, and it won’t cost you all that much.

One of the top reasons VoIP has far outpaced traditional phone service is the flexibility and professional calling features for one low price.

Instead of having a server room with an on-premises PBX (Private Branch Exchange), all you need are configured VoIP desk phones.

Don’t worry, if you have a PBX, you can still benefit from VoIP technology. We’ll get to that in a bit.

Hosted VoIP for Business

In the network diagram shown below, you can see that a hosted VoIP phone system consists of many devices, including smartphones, to provide unified business communication.

Diagram of a Hosted VoIP Infrastructure (2019)

This approach is known as a cloud phone system or a “cloud PBX.” Administrators can manage the permissions and features for each employee along with more sophisticated VoIP features with an online interface.

When an employee calls a customer, they pick up the handset and dial them just as they normally would. The IP phone (or app) travels through your Local Area Network (LAN) switch and business router before reaching the VoIP service provider. From there, the VoIP provider establishes the call.

If the network path to the called party supports a digital voice signal, then the call quality is upgraded to high definition. Otherwise, a VoIP provider connects the call over the Public Switched Telephone Network (PSTN).

Using a hosted VoIP system in your business is that simple. However, for established businesses with a more sophisticated phone system, there are different needs.

If the office uses a PBX, you probably also pay for trunked telephone lines. These trunked lines handle voice calls from the PBX to the phone company—and they’re not cheap!

Related: What Is Session Initiation Protocol (SIP) & How Does It Work?

SIP Trunking for PBX Phone Systems

In some cases, companies are locked into their hybrid phone system due to the costs to replace hardwired phone lines in every office. Since a VoIP uses the Session Initiation Protocol, it can be used to establish multiple lines of calls through the internet.

You’ll see in the diagram below SIP trunks accept calls from the VoIP provider. Inbound and outbound calls are funneled in much the same way until it reaches the business location and is hardwired into a PBX. Like old school analog circuit-switches, the “trunk” acts as a switch to control and funnel data.

SIP Trunking in a VoIP Business Phone System

The most significant benefit for large and small businesses alike is if they have a hardwired telephone system on site. SIP Trunking allows you to mix analog phone systems and new VoIP solutions to eliminate redundancy.

SIP Trunking provides multiple channels of voice service on-demand for any IP-based PBX. A SIP Trunk can either be metered or unmetered for $15–$25 each month. They aren’t too hard to set up, either. Simply provide the SIP username and password into your PBX.

Mobile Devices & Wi-Fi Connectivity

Thanks to the meteoric rise of mobile devices in the workplace, unified communication is a requirement.

Employees are no longer tethered to their desks. For road warriors and remote staff, they can take business calls using nothing more than a VoIP app for their smartphone.

In some offices, Ethernet might not be a practical option. The speed of Wi-Fi has improved substantially, which has made way for Wi-Fi calling. While a CAT 5e or CAT 6 connection is optimal, employees can go completely wireless and take calls around the office if you have a strong Wi-Fi signal throughout.

Keep an eye on your network congestion bandwidth utilization. You might need to adjust a few network settings for optimal performance. Visit our VoIP Troubleshooting Guide to address these issues once and for all.

Can I Use My Existing Phone With VoIP?

To use your existing analog phone with VoIP by using an Analog Telephone Adapter (ATA), which can retrofit existing phones with more features and capabilities. In many cases, it may be more desirable to use a SIP phone because of its native functionality to work with VoIP services.

Did you know that your fax machine may not work correctly on VoIP? It’s true. Since VoIP compresses and uncompresses the audio over the line into a digital format, the codecs clip little bits along the way for maximum reliability. You can also use an ATA specifically designed for fax machines that can provide full functionality with VoIP.

Pro tip: You might not even need a fax machine since you can send and receive faxes with Nextiva’s business phone service.

If you must keep your analog phones and fax machines, then make sure you pick up a VoIP telephone adapter that works with your phone service.

How Much Does a VoIP Phone System Cost?

A VoIP phone system costs between $20 and $40 monthly per line. Depending on the number of users, commitment, and features, your costs could be less. A decent IP phone starts at $70, but they can also be leased for as low as a few dollars each month.

The total cost of a VoIP phone system should factor in phones, accessories, service, and any one-time setup costs. Nextiva doesn’t charge any setup or activation fees and includes free porting and setup of your business phone number.

Top VoIP Phone Features

In addition to some serious cost savings, extensive phone features are another important motivation why so many companies switch to VoIP.

Here are the top features offered in a VoIP phone system:

  • Unlimited Calling – Call any phone in the United States and Canada as much as you want. No minutes to track. Instant savings.
  • Online Faxing – Send and receive unlimited faxes, just like email. No hardware or wires. Faxing is finally easy and straightforward.
  • Auto Attendant – Greet callers instantly when they call and direct them to the right person. Give your company an excellent first impression from the moment they call.
  • Call Queues – Handle calls when your team is busy. Callers wait in line for the next agent. You and your customers will love it.
  • HD Voice Quality – Get superior sounding phone calls. The g.722 codec is engineered to eliminate annoying static for vibrant conversations.
  • Conference Lines – Use a dedicated conference line for meetings with up to nine participants. Meet, moderate, and record in HD.
  • Voicemail-to-Email – Get voicemail messages delivered to your inbox. Listen to voicemails and respond through your email.
  • Smartphone App – Answer business calls from on the go. Never miss an important call again. It’s available free for iOS and Android devices.
  • Real-Time Presence – See who’s available to receive calls and chat messages. Live status updates are accurate and straightforward.
  • Team Collaboration – Chat with your team on one system. Flawless video and screen sharing enables you to get work done faster.
  • Text Messaging (SMS) – Send and receive text messages with customers. Perfect for quick updates and appointment reminders.
  • CRM Integrations – Optional integration you can use with your current CRM. Boost productivity with a deeply integrated workflow.

These are just the tip of the iceberg when it comes to our VoIP features. If your company has a contact center, you should focus on these call center features to achieve faster ROI.

VoIP Phone System Requirements

Thinking about setting up a VoIP phone system in your business? How can you make sure your business is ready?

Network Bandwidth

You’ll need a reliable internet connection such as DSL, cable, or fiber from an Internet Service Provider (ISP). The standard bandwidth required for VoIP is 100 Kbps per device. Depending on the type of data and features you’ll use, you might need more bandwidth than the standard.

Check your connection quality with our free VoIP speed test.

Phones & Devices

Another major factor is ensuring that you have the right devices in place.

You must have a SIP phone, a softphone, or an Analog Telephone Adapter to complete calls over VoIP. Here’s a quick summary of each:

  • SIP Phones – All VoIP phones are SIP phones and vice-versa. They establish calls by using a VoIP service provider. Nextiva offers a wide variety of VoIP desk phones that offer a ton of functionality for both small businesses and enterprises.
  • Softphones – If you don’t need a traditional telephone, you can just download an app to make VoIP calls using your cellphone, laptop, or desktop. These VoIP applications keep your Caller ID separate because the voice data is handled directly through your VoIP provider.
  • Analog Telephone Adapters – For the holdouts of analog phones, never fear. With an ATA, you can retrofit your phones, so they function correctly over VoIP. They might not have all the conferencing capabilities available, but they offer reliable service.

Related: 10 Best VoIP Headsets for Your Business 

Selecting the Right VoIP Phone System

Lastly, you need the right VoIP service. Partnering with a trustworthy provider ensures a reliable setup and a pleasant experience.

To select the best VoIP phone system, consider the following factors in your decision:

  • Initial and monthly costs
  • Reliability and uptime
  • Availability and quality of customer service
  • Longevity and reputation of the company
  • Ease of use of the products and services
  • Customer reviews and case studies

U.S. News and World Report recently rated Nextiva as the best business phone service nationwide. Glassdoor also recently named the company as one a top employer in the United States in 2020.

When the people working for your VoIP phone service keeps employees happy, you receive superior service.

Get the #1 cloud phone system
made for the way work gets done.

About the author

Cameron Johnson is a market segment leader at Nextiva. Along with his articles on Nextiva's blog, Cameron has written for a variety of publications including Inc. and Business.com. Cameron was recently recognized as Utah's Marketer of the Year.