What is a PBX? The Definitive Guide to Private Branch Exchange Systems

February 3, 2023 10 min read

Cameron Johnson

Cameron Johnson

What is PBX

As your company expands from a startup to a thriving business, you will want to provide phone connectivity to your staff. It’s likely you’ll find yourself researching Private Branch Exchange (PBX) systems to do this.

This guide breaks down all the essentials you need to know about modern PBX solutions. Even if you’ve never managed a PBX before, you’ll be able to jump around to the parts that matter to you.

What is a PBX?

A PBX is an acronym for Private Branch EXchange, a private telephone network allowing users to talk to each other. Different hardware components work together to provide connectivity to the telephone network.

A PBX operates a company’s internal telephone network. It’s also responsible for relaying calls to the outside world, including routing and advanced calling features for inbound and outbound calls.

Setting up a PBX is no small task. A company enlists the help of one or more systems administrators with decades of telecom experience. You would also need the physical space to place the PBX system in the office, like a closet or server room.

To better appreciate the features and benefits of a commercial-grade PBX, we must first talk about the phone system.

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Setting Up Your Telephone Network with a PBX

Plain Old Telephone System - Diagram

The traditional telephone system is known as the Plain Old Telephone System, or POTS for short. It’s based on the twisted pair of wires from the local phone company to the building. POTS is basic, reliable, and hasn’t changed much in 140 years.

Telephone service providers connect calls with others using the Publicly Switched Telephone Network (PTSN) on the Integrated Services Digital Network (ISDN) protocol. The PSTN makes it possible for a Verizon customer to call an AT&T customer as well as patch calls over locally.

Providing a business with phone service can be expensive. A typical traditional business phone bill can easily be in the thousands every month just for a hundred lines.

There has to be a better way.

PBXs allow a business to run an internal phone system and use fewer phone lines from the phone company. Top PBX systems can manage voicemail, auto attendants, and recorded messages. This also includes phone extensions for everyone in the company.

PBX Analogy: Computer Networks

You might have heard long ago that the internet was running out of IP addresses. To solve this predicament, someone would use a router within an office to assign internal addresses to each device. All those devices would then share the same IP address when interacting with the outside world. Home and business routers have effectively eliminated the concern of running out of IPs and added a bit more security.

The same approach applies to a Private Branch Exchange. It’s a phone network that serves employees but shares the same outbound channel when they dial out. Internally, employees can use any phone extension, but they share a finite set of business phone numbers externally.

Cloud-based PBX has redesigned how businesses handle phone calls, offering a significant upgrade to past limitations. Before, PBXs were proprietary and very difficult to maintain.

Today, PBX systems have evolved quite a bit. No longer beholden to the local telephone company, calls are made using Voice over Internet Protocol (VoIP) technology. Instead of analog lines, SIP trunking can establish connectivity for a fraction of the cost.

Want to learn more about Voice over IP?
Our beginner’s guide to VoIP will help you understand the ins and outs of VoIP.

PBX systems empower IT leaders to maintain their existing devices with an all-digital backbone by assigning different business phone numbers to different extensions. Alternatively, a cloud PBX blends the best of both worlds with a fully managed phone system deployment.

Now that we know the purpose of a Private Branch Exchange let’s learn about the benefits of a modern PBX for business communications.

PBX System Benefits for Businesses

It’s not every day that businesses specifically want to set up their phone system. There has to be something in it for them to move their phone service to the cloud.

Companies large and small enjoy the impressive capabilities of a PBX. Here are the top reasons why businesses use a PBX:

  1. Manage and complete calls on a specific, pre-programmed schedule. You can choose the direction of the “branching out” and set your own rules in the PBX network tree. Operators can restrict or permit international dialing as needed to avoid high costs.
  2. Transfer calls between users and departments with ease. Establish and maintain connections without dropping calls. You can transfer calls effectively through a warm transfer or cold transfer. Either way, you can transfer calls reliably.
  3. Customize greetings with recorded messages, including the choice of music for your business. This feature is a fantastic way to alert customers about a sale or service issue.
  4. Operate a call center to help you manage a sales team or customer support department. While costly, a PBX can hold inbound and outbound calls in a queue based on its physical limitations.  A cloud-based PBX can handle more callers and distribute them to the desired people or teams.
  5. Connect multiple office locations with the same phone system so employees can talk to each other. Instead of managing separate phone systems, you would use a PBX to handle this call routing.

Related: What Is Session Initiation Protocol (SIP) & How Does It Work?
Today, companies aim to configure their PBX as a cloud phone system with managed PBX features across many locations and users. This approach allows for the most flexibility at an affordable price.

Types of PBX Phone Systems

Network Diagrams: Hosted PBX SIP Trunking

PBX phone systems exist in a few different varieties to fit just about any business need thrown at it. As business applications have migrated to the cloud, so have PBXs.

Here are some of the key differences at a glance:

Hosted PBXOn-Site PBXHybrid PBX
IntegrationsCan integrate with software, like CRMs and other appsNoMay be possible, but with limited functionality
Hardware requiredInternet routers and internet-connected devicesPhysical wiring, PBX system, and landline phonesPhysical wiring, PBX system, internet router, internet-connected devices
DowntimeTypically 99.99% uptime or betterOffline for regular maintenance or unexpected system failuresOffline for regular maintenance or unexpected system failures
Average upfront costFree or low-costAround $1,000 per user, plus hardware costsSeveral thousand dollars, plus the cost of the original PBX system
Average ongoing costAround $30-50 per user per month, plus optional hardware costsAround $50-100 per user per month, plus hardware costsAround $50-100 per user per month, plus optional hardware costs
MaintenanceNone is required, all maintenance is handled by PBX providerConsultant or in-house IT expert on call to troubleshoot and upgradeConsultant or in-house IT expert on call to troubleshoot and upgrade
Supported channelsVoice calls, SMS texts, video calls, conference calls, internet fax, and moreVoice callsVoice calls
ScalabilityCan add new phone lines in a few clicksNew phone lines require additional hardware wiringCan add new phone lines in a few clicks
Remote work supportFully compatible with remote devices including cell phones and laptopsNo supportMostly compatible with remote devices

There are a few options to consider for your PBX: hosted, on-premise, and hybrid.

Hosted PBX

A hosted PBX is also called a Cloud PBX, Virtual PBX, or IP PBX. It’s often included as part of a unified communications platform that lets you connect and route internal and outside lines in a single system.

With a hosted PBX system, you can manage your employee’s phones all from your web browser. Because it’s hosted in the cloud instead of on a physical server, almost any device anywhere in the world with an internet connection can use the system, including computers, cell phones, and IP phones.

Simply connect new or existing devices, and you’re done. You can adjust PBX features like call transfer, call recording, voicemail transcription, call routing, auto attendants, interactive voice response (IVR), hold music, call forwarding, and more from an online portal.

And you can fly through the online setup in minutes, not weeks. Since you directly manage this cloud-based PBX, all devices are under your control. Maintenance is included in the monthly cost, so you aren’t dependent on a consultant or in-house IT professional to fix problems.

Most modern IP PBX systems offer additional features you won’t find with landline systems. For example, a VoIP PBX can connect to your business’s CRM software, route incoming calls to cell phones, handle large conference calls, and integrate with other communication channels like SMS or video conferencing.

Even better, a cloud-based PBX is more cost-effective than an on-premise system. Its features are updated regularly, and you won’t need to spend time setting up and maintaining the network infrastructure.

On-Premises PBX

An on-premises PBX is an in-house communication system for handling incoming and outgoing calls. It’s the traditional method that’s been used for generations and is essentially an automatic version of the manual switchboard.

On-premise PBX systems require an on-site server and manual wiring to each business phone. This results in a relatively high upfront cost of around $1,000 per line, plus ongoing occasional maintenance (consulting) fees.

On-premise PBX systems were once the only option, but today they’re limited and cost-prohibitive for most businesses. The underlying technology PBX systems were built on—landlines—is becoming less relevant each year. And a traditional PBX system lacks many of the advanced features you’ll have with a modern business telephone system.

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They’re also more vulnerable to security threats. According to the FCC, some phone scams target innocent staff using legacy PBX systems to relay expensive international calls.

As a business owner, you want to ask yourself, “Does our PBX yield the most value every year? Are we spending too much managing it?” Regarding depreciating assets, on-prem PBX systems are costly to maintain, scale, and configure.

Hybrid PBX

A hybrid PBX adapts an on-premise PBX system for use with VoIP telephony. It uses SIP trunking technology to provide voice service for your company’s PBX system. This multi-channel voice service is available without changing other PBX features. As your company grows, you add more channels without needing to install the wiring an on-premise system requires.

Setting up a hybrid PBX with a top-rated SIP trunk provider is a worthy option for companies that can’t afford a complete overhaul. It provides your PBX with new scalability and lower communication costs with the same hardware.

Despite these benefits, however, hybrid systems are still limited by the requirements of an on-premise PBX. They require upfront setup, server space, and ongoing IT maintenance costs. While it’s a good option for transitioning a legacy system to VoIP technology, few businesses would benefit from installing a new hybrid system.

PBX Comparison: On-Prem vs. Hosted PBX

Comparing on-premises and hosted PBX systems can help you make the right choice for your business. Whether you’re researching PBX systems for yourself or a client, you can recognize the benefits at a glance.

On-Premises PBXCloud-Hosted PBX
Potentially lower cost per seatNo upfront costs
No use of the internetModest use of network bandwidth
Basic calling featuresNo maintenance
Unexpected maintenance costsRedundant data centers
You manage the infrastructureTraining and support included

Now, let’s look at the advantages and disadvantages of each type of PBX.

On-Premises PBX Pros & Cons

PBX AdvantagesPBX Disadvantages
CustomizableHigh upfront costs
Low monthly costsSlower deployments
Doesn’t use internetCostly support and maintenance
Some calling featuresPhysical hardware and server space
Limited scalability

One Cloud Phone System to Rule Them All

See why businesses love the flexibility of Nextiva’s Cloud Phone System.

Cloud-Hosted PBX Pros & Cons

Cloud PBX AdvantagesCloud PBX Disadvantages
CustomizableNeeds a broadband connection
Low monthly costsNeeds VoIP phones or a VoIP app
Many calling features
No upfront costs
No physical space needed
No servers needed
On-demand scalability
Affordable or free support
Faster deployments

For startups, small businesses, and enterprises in 2023 and beyond, a hosted PBX is the preferred way to set up phone service for your company. You’ll save yourself a ton of stress and budget.

How to Choose the Right PBX Type for Your Business

If you’re deciding which PBX system to use, the best way to start is by looking at the system you already have.

Investing in a hybrid system may make sense for organizations with an existing on-premise PBX system. This will adapt your PBX hardware to VoIP, resulting in better call quality, security, and advanced features.

A hosted system is a clear choice for businesses starting from scratch without a phone system. It’s built for modern work and has features for remote work and near-infinite scalability.

Businesses that opt for a hosted PBX or hybrid system with SIP trunking can reduce their telecom costs by 60%.

Cloud-based communications is expected to grow at a compound annual growth rate of 13% through 2031. It’s a modern system that’s helping bring small business communications into the 21st century.

When choosing a VoIP provider, look for these features.

  • Reliability. A modern PBX is worthless if it’s offline. The industry standard is 99.99% or better uptime, and depending on your plan, you can often get a service-level agreement (SLA) guaranteeing uptime.
  • Cost. Choose a provider that offers plans that fit into your budget.
  • Security. Look for a provider with 24/7/365 monitoring and audits like SOC 2 or ISO/IEC 27001 certification. Consider additional features like call encryption.
  • Flexibility. Modern systems work with physical VoIP desk phones as well as softphones you can use on computers or smartphones.
  • Support. If something goes wrong, you need a team you can trust. Nextiva has award-winning customer support and 94% customer satisfaction.

Related: Cloud-Based Phone System Pros and Cons (+Best Practices)

Adapt a PBX to Your Company—Not the Other Way Around

No matter what PBX you choose, you should strive to make sure it meets your company’s needs. The way we work has changed so much in two decades. Shouldn’t your PBX keep up with you?

One of the fundamental takeaways here is that you can’t only decide based on the sticker price of a business phone system. Ensure you consider the uses, limits, and flexibility in overall communication features.

Assess your company’s growth trajectory and range of internal and external communications. No one knows your business better than you do.

Questions about PBXs

How does a PBX phone system work?

A PBX phone system connects all phones in an office to a central system that manages all incoming and outgoing calls. The system routes calls, manages voicemails, and provides advanced calling features. PBX phone systems run on either hardware or software — or a hybrid of both.

Is a PBX phone system right for my small business?

PBX phone systems are a good fit for small businesses that handle many calls and require only a few calling features to work reliably. According to a survey by Software Advice, companies that use a cloud PBX report increased efficiency and better call management.

How much does a PBX phone system cost?

Basic PBX systems cost a few hundred dollars, while more advanced ones can cost several thousand. Compare prices from different vendors and choose one that fits your budget and requirements. According to Fit Small Business, the average cost of a PBX phone system for a small business is around $500 per user.

On-premises phone systems often require extensive training, technical skills, and costly hardware. A cloud-based phone system costs about $30 per user and requires minimal technical skills.

Can I install a PBX phone system myself?

While it is possible to install a PBX phone system yourself, it can be complicated and time-consuming. Due to the potential security and risks to business continuity, we recommend you consult a professional to install the telephone system or consider using a cloud-based alternative like Nextiva.

What support is available for PBX phone systems?

Most PBX phone system vendors offer paid or premium technical support and customer service to help you troubleshoot issues. In addition, they may provide formal training programs to help you and your staff configure the PBX system. However, a cloud PBX vendor like Nextiva offers 24/7 customer support at no additional charge — it’s included with your company’s phone or trunking service.

Cameron Johnson


Cameron Johnson

Cameron Johnson is a market segment leader at Nextiva. Along with his well-researched contributions to the Nextiva 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.

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