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What Is VoIP & How Does It Work?

Voice over Internet Protocol (VoIP) is a proven technology that lets anyone place phone calls over an internet connection. With the rise of broadband, VoIP has become the definitive choice for phone service for consumers and businesses alike.

People enjoy using VoIP telephone service over traditional phone lines. Why? It offers many more capabilities than analog phones. And it can do it all for less than half the cost.

Cloud phone service providers include powerful features not found with standard phone service. Auto attendants, call recording, custom caller ID, voicemail to email, and so much more. Plus, you can take calls and work from anywhere.

We’ve expanded this guide to take a closer look at what you need to know about Voice over Internet Protocol. We’ll cover everything you need to know, including the benefits of VoIP phone service.

What is VoIP?

VoIP is an acronym for Voice over Internet Protocol that describes the method to place and receive phone calls over the internet. Most people consider VoIP the alternative to the local telephone company.

If you’ve heard of an IP address, that’s your Internet Protocol address. An IP address is how computers and devices communicate with each other on the internet.

VoIP isn’t actually all that new. Telephony has relied on digital lines to carry phone calls since the late 90s. VoIP is a cost-effective way to handle an unlimited number of calls.

So, what does this mean for you?

VoIP uses your existing internet connection.
VoIP uses your existing internet connection.

If you have an internet connection, you call anyone without the need for local phone service. VoIP solutions work on any computer because it’s built upon many years of open standards.

VoIP service providers do more than establishing calls. They perform routing of outgoing and incoming calls through existing telephone networks. Landlines and cell phones depend on the Public Switched Telephone Network (PSTN).

Traditional telephones use analog lines to carry voice signals. If you want to make calls, you have to have extra wiring installed.

Many businesses rely on specialized hardware for phone service. This equipment is known as a Private Branch Exchange (PBX). It connects internal phone extensions to the public telephone network. PBXs are generally quite costly to set up and maintain.

There’s a better option.

A trusted VoIP provider can handle everything for you. Plug your IP phone in, and you’re done. These digital phones use your high-speed internet connection to establish connectivity.

High-speed internet access is available for 93.5% of all people in the United States, according to data provided by the FCC and visualized by Microsoft.

FCC broadband availability map of the United States.
Broadband is available to nearly 94% of Americans. (Microsoft)

VoIP converts your phone calls into data and is sent over the internet. You can use the Ethernet cables or skip them if you have a strong Wi-Fi signal. It does so at a much lower cost than older telephone systems. Voice over IP has many advantages over traditional phone service. We’ll discuss later on.

How does VoIP work?

Voice over IP uses Internet Protocol, an essential building block of the internet. IP telephony is a massive innovation from the century-old telecommunications system.

For phone calls, the conversation is exchanged using small data packets. The internet can send these data packets around the world in less than a second. For internet telephony, these packets travel between your phone and a VoIP provider.

A VoIP phone system facilitates calls between other phones or over to another telephone company. It also provides other useful functions like voicemail, call forwarding, call recording, and more.

In four steps, here’s how VoIP works.

  1. Your phone connects to your switch or router in your Local Area Network (LAN).
  2. When you dial a telephone number, your IP phone tells your VoIP service provider to call the other party.
  3. Your VoIP service establishes the call and exchanges data packets from your IP phone.
  4. Your VoIP phone converts these digital signals back into the sound you can hear.

Voice over Internet Protocol bypasses the telephone company entirely. Wherever you have a broadband internet connection, you can use VoIP. It’s a significant upgrade from an analog phone system.

You used to need expensive, proprietary equipment to use VoIP — but that was over 20 years ago! Today, VoIP is built upon open standards such as Session Initiation Protocol (SIP). SIP provides complete interoperability between different desk phones, conference phones, and VoIP apps.

Cloud-based PBXs are responsible for features like voicemail, conferencing, and call routing. When you think about it, they act as their own full-service phone companies that you control.

All you need is a broadband internet connection (cable, DSL, or fiber) and you can reap all the benefits of VoIP.

Pros and cons of Voice over IP

There are pros and cons to consider when looking into VoIP for handling your telephone calls to VoIP. Here’s an honest look at the benefits and drawbacks of voice over IP.

Benefits of VoIP

  • Lower cost – Many consumers and businesses alike have realized substantial cost savings and lowered their phone bills by over 60%.
  • High-quality sound – There’s a noticeable difference in the call quality, so the audio isn’t muffled or fuzzy.
  • Advanced features – Leverage premium features to run your company such as auto attendants, call recording, and call queues. They’re often included with business phone service plans.
  • Remote-ready – Use your phone service wherever you work. No technical setup is necessary if you work from home.
  • Call anyone worldwide – International long distance rates are as low as $0.04 per minute to call Mexico or $0.01 to reach the United Kingdom.

Downsides of VoIP

  • Needs a high-speed internet connection – VoIP doesn’t work well on dial-up or satellite-based internet connections. You’ll need at least 100 kbps (0.1 Mbps) per phone line.
  • Emergency services limitations – In the unlikely event you need to call 911 from your VoIP phone, you need to tell the operator your actual location. Voice over IP systems default to sending your company’s mailing address to public safety operators.
  • Makes analog phones obsolete – Voice over IP uses new technology that doesn’t rely on analog signals. You’ll likely want to upgrade outdated phone handsets. Read our advice later to find out how you can get a free VoIP phone.

Check out our comprehensive comparison between VoIP and landlines. It’ll help you understand the differences.

VoIP setup is easy as plugging in two wires.

Is it easy to use VoIP?

The truth is that VoIP is easy to set up and to use for everyday personal and business calling. As long as you have a working internet connection, you can enjoy making calls over the internet.

Unlike proprietary calling apps like Skype or WhatsApp, you can call any phone number. You can use your VoIP service to call anyone using telephone companies like AT&T, Verizon, and T-Mobile. They won’t even know the difference, other than the improved call quality.

As far as setup is concerned, you don’t have to do anything technical. If you can plug in a power cord in the wall and a network cable to your phone, you can use VoIP. Follow this handy guide on how to set up your business phone service.

It’s even easier to use your VoIP phone service on your iPhone or Android. Download a free VoIP app, sign in, and you’re ready to make calls using VoIP.

How much does VoIP cost?

VoIP is surprisingly inexpensive when you consider all its capabilities. The short answer is that you can expect to pay approximately $35 per user per month for VoIP. The cost savings are quite dramatic compared to a traditional phone system or on-premises PBX.

To give you an idea, here’s how much VoIP typically costs:

  • Initial costs: $0-$50 per line
  • Monthly costs: $19-$45 per line
  • Device costs: $80-$600 per IP phone
  • International calls: $0.01+ per minute
  • Taxes and fees: Varies based on your city, county, and state.

Traditional phone systems have hidden costs you might not expect:

  • Installation fees: $50-100 per drop
  • Deposit: $100-$500
  • Maintenance contact: $1000+ annually
  • International calls: $1.00+ per minute
  • Hard pull credit check

All this is to say that we strongly recommend you obtain a free quote to confirm the exact VoIP pricing.

Mobile Phones, Desk Phones, and Laptops All Can Use Voice over Internet Protocol (VoIP)

Top VoIP phone system features

What are the attractive features available with a cloud-based office phone system? Here are the most popular VoIP features that businesses will enjoy using.

These business phone features will matter more or less depending on your needs.

1) Auto attendant

Project a professional image with a phone menu that greets incoming calls. If you’ve called a company and had to press 1 for sales, 2 for support, you’ve used an auto attendant.

An auto attendant helps you direct callers to the right person or department. You can forward calls to your voicemail or elsewhere outside of business hours.

2) Mobile and desktop apps

With cloud communications, you won’t miss calls because you’re not in the office. Several VoIP service providers now offer an app for your computer and mobile device.

It’s more important than ever to equip your team with a VoIP solution to work from home. These apps let you make phone calls, join conference calls, exchange text messages, and more.

You can use these telecommunications apps with or without a separate desk phone. It’s your choice.

3) HD call quality

There’s almost nothing worse than asking callers to repeat themselves. HD Voice increases the sound quality in your phone calls. This VoIP technology makes phone calls sound twice as clear as a standard phone call.

For even fuller sound, many VoIP headsets and phones provide noise-canceling capabilities. This high-definition sound quality is noticeable even for long-distance calls.

4) Unified Communications

VoIP elevates your team’s workflow through a concept known as Unified Communications (UC). Instead of using several disparate apps, your company’s communications platform is fully integrated.

It’s now even easier for employees to connect with each other and with customers. You can even flip calls between mobile devices, too.

Your team gets work done faster by meeting over video and screen sharing. UC makes real-time communication intuitive and well-organized.

Here are some of the key functions within a UC platform:

  • Instant messaging
  • Team chats
  • Video meetings
  • Screen sharing
  • Conference calling
  • Mobile and desktop apps

5) Call encryption and VoIP security

VoIP security is top of mind for business owners. Telephone calls carry confidential information like credit card numbers and HR conversations. You must protect these assets, or it could cost you.

VoIP is safe and secure even as data packets travel through the internet. IP phone systems have built-in security to stop bad actors from tapping your calls.

Ask your VoIP service provider about call encryption. VoIP technologies like TLS and SRTP scramble call data making eavesdropping near impossible.

You should consider whether a VoIP provider is accredited and meets industry standards. It’s handy to have a requirements checklist when selecting a business phone service.

Useful questions to ask include:

  • Are they accredited (PCI, SOC 2, ISO/IEC 27001)?
  • How many data centers do they have?
  • What is the uptime of their VoIP service?
  • Do they provide HIPAA compliant IP telephony?
  • Can you access real-time call logs?

Related: An In-Depth Look at VoIP Security & Call Encryption

6) Call recording

Leverage your phone system to record phone calls between customers and your staff. Is your team handling calls with care and precision?

Recording calls through your phone system reveals areas for your team to improve. Plus, it’s secure, so only authorized personnel can access it.

The advantage of VoIP call recording is that it’s undetectable to all parties. It also requires no extra hardware, unlike landline PBX systems. Goodbye, cassette recorders!

Related: 40+ Best VoIP Features Your Business Can’t Do Without

Do I need a VoIP phone?

Voice over Internet Protocol means that traditional phone handsets won’t work as-is. You will need you to use a special adapter to retrofit your existing phones or buy replacement IP phones.

The good news is that VoIP desk phones aren’t expensive, and you can even get them for free. If you always have a cell phone or computer within reach, you might not even need an IP phone. 

There are a few factors to consider when deciding whether to transfer to VoIP service. We’ll cover a few of the most important ones below.

1) Do you work from home?

Many companies have embraced telecommuting over the long haul. Working remotely comes with the caveat of having a variety of Local Area Network configurations.

The case for a desk phone is clear cut. A desk phone is familiar to most people for voice calls — it’s natural, and it just works. With no extra configuration necessary, employees have an always-on phone.

If your team is nimble with software apps, they can use a softphone and get going in minutes. You can provide them their username and password.

You don’t need a desk phone in the short-term, but for essential employees, it is a welcome office appliance.

2) Are there any must-have analog phones?

You can always replace traditional phones with affordable IP phones. However, there are the few that like their fax machine or phone they’ve used for years.

To use an existing analog phone with VoIP, you’ll need an Analog Telephone Adapter (ATA). These are pretty straightforward in how they function. They retrofit these older devices to send digital data over the internet.

Related: What Is a VoIP Phone & How Does It Work?

3) Is VoIP Reliable?

In the early days of Voice over IP, the call quality was inconsistent. Sometimes calls dropped, and delays were common. As internet bandwidth increased, VoIP call quality has improved dramatically.

VoIP calls sound more crisp and clear as compared to a landline phone. However, this will depend on your internet service provider. The SIP protocol itself allows for error-correction protocols like TCP or UDP. It’s your choice.

Did you know that you can have your cloud PBX provider forward calls to your cell phone if you’re not available? This redundancy is a perfect way to stay online during a power outage.

Reaching emergency services

If you dial 911, operators might not know of your actual location. You have to tell them. If there’s a disruption to your internet connection, a VoIP phone cannot complete the call.

The FCC provides some tips to keep in mind when using VoIP to call emergency services in the United States.

To enhance safety, update each user’s E911 location where they perform their work. For instance, if they work from home, use their home address.

What to look for in a VoIP provider?

Having a commercial phone system adds credibility and reliability to your business. However, not all providers are the same. To decide on the best business phone service, consider your specific business needs.

When choosing a phone plan for your company, you will need to decide what goals you have. Think about your needs today, tomorrow, and a couple of years out.

Assess your current and future needs

  • Incoming call volume
  • Current resources and staffing
  • Voice over IP functionality
  • Video conferencing needs

Examine your call volume to determine which VoIP plan you will need. If you have a team dedicated to calling prospects or supporting customers, you might be a good candidate for a virtual phone system. Think about scalability so that your small business can grow seamlessly.

Discuss with your team to identify which must-have features you need. It’s likely that most free VoIP solutions fall short.

Know What You Need With a VoIP Feature Checklist

Tips for selecting the best VoIP provider

Once you have an idea of your VoIP features and requirements, look for a service provider that fits your budget and can grow with you. Take into consideration customer reviews, availability of live help, and documentation.

Here are several qualities to look for in a VoIP phone service provider:

  • Proven reliability with minimal downtime
  • Compatible with your network
  • Live support available 24/7
  • Multiple, redundant data centers
  • No-pressure sales experience
  • Optional professional services
  • Examples of clients in a similar industry

When you’re in discussion with a VoIP provider, ask about the available specials. You could be eligible for a free business VoIP phone or a hefty discount, depending on your commitment.

For most people, VoIP is the clear winner over analog landlines. VoIP offers the best value, cost savings, and the most useful features.

When you switch to VoIP, you won’t even think about your old phone service. You could save up to 65% off your business phone bill.

Related: The Ultimate Business VoIP Phone System Buyer’s Guide

About the author

Yaniv Masjedi serves as Nextiva's CMO. An avid reader and lover of all things marketing, leadership, and personal growth, Yaniv is obsessed with creating strategies that drive awareness, strengthen brands, and create customer-centric culture. To get in touch, follow Yaniv on LinkedIn.