What is VoIP (Voice over Internet Protocol)?

VoIP (Voice over Internet Protocol) technology uses the Internet, not the traditional wired network, to make and receive voice calls. Switching from a landline to a VoIP phone system lowers communication costs and lets users work from any internet-connected location on their preferred device. VoIP also gives businesses access to advanced features like auto attendants, intelligent call routing, and visual voicemail. With the PSTN switch-off approaching, VoIP will soon be the only technology used to power voice calling.

Now is the time to learn what VoIP is, how it works, how it differs from landline services, associated costs and hardware, and key features to look for.

Consider this your ultimate guide to VoIP.

• What is VoIP?
• How it Works
• VoIP vs Landline
• Types of VoIP Services
• Essential VoIP Equipment
• Pros and Cons
• Key VoIP Features
• VoIP Cost
• Choosing a VoIP Provider
• The Future of VoIP
• FAQs

What is VoIP?

VoIP (Voice over Internet Protocol) is a voice communications technology that makes and receives telephone calls over the Internet instead of the wired analog network.

Since VoIP phone systems aren’t powered by the PSTN (Public Switched Telephone Network) they aren’t limited to a single physical location and don’t require extensive on-site installation or cabling. VoIP services are cloud-based, and therefore accessible on any device in any location with a working Internet connection. Users can access their VoIP phone system on desktop and laptop computers, tablets, mobile devices, VoIP phones (often called IP phones), or even VoIP-enabled landlines.

Compared to traditional landlines, VoIP has a better call quality, is more affordable, provides better overall value thanks to its advanced features, and is easier to scale.

VoIP is also known as Voice over IP, virtual telephony, a cloud phone, or an online phone system.

How Does VoIP Work?

In simple terms, VoIP works by converting analog voice audio into compressed digital data packets that are sent to the call recipient’s device over the Internet, reassembled in the correct order, and played back as standard voice audio.

To ensure that VoIP services run smoothly, talk to your Internet Service Provider to ensure you have enough bandwidth. VoIP requires at least 100 kbps of bandwidth per concurrent call, meaning, for example, 4 simultaneous calls require a total of 400 kbps. While 20-150 ms of latency is standard for VoIP, any more will noticeably degrade call quality.

Now that you know the basics, let’s break down the step-by-step process of how VoIP calling works.

Step 1: SIP Registration

SIP (Session Initiation Protocol) registration is the first step of VoIP calling, as it’s what actually links your device to the central VoIP server, allowing you to make/receive calls over the Internet. The registration process establishes your device as a SIP endpoint and assigns it a SIP Address of Record. The SIP address of record acts like an IP address, ensuring that other endpoints (AKA, other devices) can call or receive calls from you. Think of SIP Registration as an automated “network login” that connects your device to the VoIP network.

Step 2: VoIP Connection

Once SIP Registration is complete, you’re ready to make/receive VoIP calls. When you make an outbound call, a virtual link–the VoIP connection–is established between your device and the call recipient’s device.

Since any Internet-powered device can make/receive VoIP calls, there are a variety possible VoIP connections, including:

• Softphone Connections: A softphone connection lets you make/receive VoIP calls via mobile apps instead of physical landline or IP phones.
• Computer-to-Computer Connections: A computer-to-computer connection links separate computers (laptops or desktops), allowing them to make/receive VoIP calls to each other. VoIP services are accessible directly in-browser or via the downloadable softphone app.
• Computer-to-Phone Connections: A computer-to-phone connection enables VoIP calling by linking your computer to landlines, IP phones, and smartphones (essentially, any kind of phone.)
• Landline Connections: A landline connection uses an Analog Telephone Adapter (ATA) to connect your landline to the Internet-powered VoIP network, allowing you to keep using traditional analog phones. You may use a hybrid PBX system to facilitate VoIP calling with landlines.

Step 3: Data Packet Exchange

Once a connection is established between two VoIP endpoints, VoIP codecs convert analog voice audio into digital signals, then compress the signals into digital data packets. These data packets then travel to the recipient’s device over a wide area or local area IP network. Once they’ve arrived at the other endpoint, the packets are reassembled and decompressed back into analog voice audio. This two-way process repeats itself until the calls end, using codecs to efficiently transmit voice signals between devices. VoIP codecs provide HD audio and eliminate call quality issues like jitter and latency.

Step 4: End of Call

When a caller hangs up, the SIP notifies the VoIP server, which ends the session and disconnects the VoIP devices.

VoIP vs Landline Phone Service

The table below outlines the main differences between VoIP and landline phone systems:

Types of VoIP Services

Today, there are numerous types of VoIP services to choose from, but the most popular are hosted VoIP, on-premises VoIP, and and hybrid phone systems. Below, we quickly explain the differences between these solutions and who should use them.

Hosted VoIP

Best For: Hosted VoIP is best for remote or hybrid teams of any size that don’t want the expense or hassle of on-site equipment. Instead, they prefer third-party VoIP services that end users don’t have to manage or maintain.

Hosted VoIP, also called cloud VoIP or Hosted PBX, is a virtual phone system that’s hosted offsite, in the cloud, by the third-party service provider. Hosted VoIP doesn’t require bulky equipment or complex installations, and can usually be set up in less than 24 hours.

Hosted VoIP services are sold in monthly or annual tier-based plans that let businesses scale to add features, user seats, and other advanced capabilities as their needs grow. In addition to cloud calling, hosted VoIP solutions include video conferencing, SMS texting, and unified communications tools like team chat and whiteboards.

On-Premises VoIP

Best For: On-premises VoIP is best for in-house teams that want to host their business phone system in their office. It’s also a good fit for businesses with in-house IT teams, or companies with stricter security standards that want greater control over their phone system.

On-premises VoIP, also known as onsite PBX, is a VoIP phone system that’s physically located in-office and managed by the end user. The business must house the server, backup power supplies, and related hardware like IP phones–meaning they’re ideal for larger offices.

Because end users have greater control over their phone system, on-premises solutions are ideal for businesses with strict regulatory requirements or high-level security needs. Note that additional lines will require on-site installation, as well.

Hybrid VoIP

Best For: Hybrid VoIP is best for businesses that want to add VoIP calling capabilities to their existing hardware or on-site PBX systems.

Hybrid VoIP leverages SIP Trunking to create a virtual link between the PSTN and VoIP networks, allowing users to continue using their on-premises equipment and desk phones.This way, businesses won’t lose the money they invested in their traditional phone systems, but get access to advanced VoIP features.

Essential VoIP Equipment

One of VoIP’s biggest selling points is that it works with your existing equipment, reducing or even eliminating the need to purchase additional hardware. That said, there are a few pieces of VoIP equipment almost every team will need.

Essential VoIP hardware includes:

• Router: A high-quality Internet router is perhaps the most important piece of VoIP hardware. Routers connect your VoIP devices to the Internet, manage call quality, and ensure voice calls use bandwidth efficiently.
• VoIP Gateway: Available as a standalone product or as a built-in feature of some routers, VoIP gateways link landlines to the VoIP network and converts analog signals into digital data packets. These gateways are essential for enterprise-level teams that want to connect multiple pieces of existing phone hardware to a VoIP network.
• Analog Telephone Adapter (ATA): Analog Telephone Adapters are similar to VoIP gateways in that they also convert analog phone audio to digital data packets, but they’re best for teams that want to connect just one phone to the VoIP network.
• IP Phones: While gateways and ATAs link landlines to the VoIP network, IP phones are desk phones specifically designed for VoIP calling. They include advanced features like color displays, background noise suppression, PC connectivity, and speed dialing.
• PoE Adapter: Power over Ethernet (PoE) adapters let you plug your Ethernet cords into them, then connect to outlets to power Ethernet cables
• VoIP Headsets: Headsets usually include automated background noise suppression, bluetooth connectivity, wireless ranges of 50 feet and up, and more.
• Conference Room Hardware: While headsets are ideal for 1:1 conversations, conference rooms require additional equipment. Virtual kiosks let employees reserve conference rooms and help visitors check in. Virtual whiteboards allow for in-person collaboration, let users save and share whiteboards, and come with features like templates, pointers, and drawing tools.

VoIP Pros and Cons

Switching from analog phones to VoIP lowers operating costs, gives you instant access to advanced features, and empowers remote teams. However, be prepared for a bit of a learning curve–and check to ensure you have sufficient bandwidth to power VoIP-based communication.

Here’s some additional insight into VoIP pros and cons:

VoIP Pros

• Cost savings: Switching from landlines to VoIP can lower communication costs by over 70%[*]. VoIP doesn’t require expensive new equipment, decreasing both startup and ongoing maintenance costs. VoIP also provides unlimited domestic calling, eliminating costly long-distance phone calls. Even international per-minutes are less expensive with VoIP–and many platforms offer unlimited global calling to select countries on upper-tier plans.  Finally, VoIP features like IVR and call routing lower the average cost per call–and can even entirely automate basic customer service interactions.
• Portability: Today, roughly 55% of employees with remote-capable jobs work a hybrid schedule[*]. VoIP services are accessible from any Internet-connected location, perfectly meeting the needs of today’s remote workforce and eliminating the need for physical office space. Users can access their VoIP phone systems from any device, making VoIP an ideal solution for mobile teams that frequently travel or meet with clients face-to-face.
• Advanced features: Access to advanced VoIP features like ring groups, auto dialers, call forwarding, and virtual receptionist increases team productivity by up to 20%[*]. Automated workflows dramatically reduce employee burnout and cut down on miscommunications, improving both customer and agent experiences.
• Scalability: VoIP providers offer bundled plans with tiered pricing, helping users avoid paying for features and seats they don’t need. Users can scale up or down depending on their business needs or purchase individual features as add-ons instead of upgrading to a higher, more expensive tier.

VoIP Cons  

• Learning curve: Though VoIP comes with advanced communication and collaboration tools, expect a bit of a learning curve when switching to VoIP for the first time. Quality VoIP providers offer on-demand an custom webinars to streamline the onboarding process
• Call quality dependent on Internet connection: VoIP requires a minimum bandwidth of 100 kbps per line, meaning you may need to upgrade your Internet speed to avoid jitter, latency, and dropped calls. To avoid service losses during a power outage, get a backup power source and ensure your provider offers network redundancy.
• Less end user control: VoIP providers are responsible for network maintenance, uptime, security, device compatibility, and available features–meaning you’ll have less control than you would with a traditional premise-based phone system.

Key VoIP Features

Though there are over 100 VoIP features -- and counting! -- to choose from today, we’ve outlined the essential functionalities that define virtual phone communication.

Call Routing

Call routing is a call management strategy that distributes incoming calls according to preset rules, ensuring each customer reaches the best available agent as quickly as possible.

Popular call strategies like skills-based, round robin, and relationship-based routing decrease call wait times while increasing FCR, leading to higher customer satisfaction levels and optimized agent schedules.

Interactive Voice Response (IVR)

Interactive Voice Response (IVR) is a VoIP self-service option that lets customers direct their own calls by responding to pre-recorded call menus via touch tone or by speaking their answers directly into the phone.

IVR systems free up agents by assisting with common, repetitive customer service requests like account balance requests, appointment scheduling, and bill payments. Often, IVR entirely eliminates the need for callers to speak with a live agent.

Auto Dialers

Automated outbound dialers (auto-dialers) expedite lead list penetration by automatically dialing lead list telephone numbers, filtering out busy/disconnected numbers, and connecting agents only to live prospects.

Today’s auto dialers are TCPA-compliant and offer a variety of dialing strategies like predictive, progressive, power, and preview modes.

Call Recording 

Automated or on-demand call recording and transcription lets call center managers review customer-agent interactions for quality assurance. Recordings are stored in a searchable cloud database with custom retention policies. Ensure you comply with local and federal call recording laws before setting up this feature.

Visual Voicemail

Visual voicemail is a VoIP voice-to-text feature that automatically transcribes voicemail messages, while voicemail-to-email tools instantly send these voicemail transcripts to your preferred inbox. As with call recordings, all voicemail recordings and transcripts are stored in a searchable database and have custom retention policies.

Call Forwarding

Call forwarding is a call distribution strategy that automatically sends (forwards) incoming calls to different telephone numbers associated with the same agent or department in a pre-set order.

Forwarding calls allows for greater team flexibility and eliminates the need for agents to be physically tied to a single location to take calls. It also prevents callers from having to hang up and dial multiple phone numbers to reach the desired agent.

How Much Does VoIP Cost?

The average cost of VoIP phone services ranges from $20-$50+ and up per user, per month depending on the specific provider, plan, and included or add-on features. Additional factors like hardware, selected VoIP phone numbers, regulatory fees, VoIP taxes, special discounts, and the number of seats needed also impact the total cost of VoIP solutions.

Here’s a summary of the average VoIP costs:

For more details, read our guide on VoIP pricing and plans.

How to Choose a VoIP Provider

When choosing a VoIP provider, the most important things to consider are:

• Scalability: Does the provider offer multiple tiered plans, each with different features suites, user minimums/caps, bundled toll-free minutes, and storage space? When examining pricing, look for the plan with the best value–keeping in mind that it may not be the lowest-priced tier.
• Available features: Make a list of the most essential VoIP features for your business, considering which features you need immediately, which ones you may want in the future, and which ones are “nice to have.” Then, examine the included and add-on features of each plan.
• Hardware compatibility: If you want to continue using existing hardware like desk phones, speakers, or headsets, ensure they’re compatible with your VoIP provider–and that, if needed, the provider offers assisted device provisioning for third-party hardware. If not, most providers offer compatible devices for rental or sale directly on their website.
• Third-party software integrations: Make sure the platform integrates with your existing third-party software, including CRM systems, collaboration and chat tools, workforce management solutions, etc. Review the provider’s developer community, APIs, and SDKs.
• Customer service and support: Evaluate the provider’s available support hours and channels by plan (24/7/ support is normally reserved for higher-tiered plans). Look into paid priority support options, custom onboarding and training availability, and average incident response/resolution times,
• Network reliability:  VoIP providers should offer a minimum SLA uptime of 99.9%, have network geographic redundancy, and offer 24/7/365 network monitoring with a public system status page on their website
• Platform security: In addition to standard security features like end-to-end encryption, access control, and custom data retention policies, review the provider’s security certifications. Top providers should be HIPAA, PCI, and GDPR compliant, offer 24/7 network monitoring, and be ISO/IEC 27001 certified, at minimum.
• Current user reviews: Comparison shop for VoIP phone systems by reading current user reviews, expert guides, and head-to-head business VoIP comparisons. Keep in mind that some providers may post overly positive reviews on third-party review sites or message forums, so always take a look at the post author’s history to ensure you’re getting balanced opinions from actual users.
• Provider demos: Quality VoIP providers offer interactive demos and/or free trials that help you and your team evaluate the platform’s ease of use, features, interface, and mobile apps. Solicit feedback from team members across departments to ensure the provider is the right fit for everyone on your team.

Unified Communications: The Future of VoIP

Although VoIP adoption was on the rise long before the 2020 pandemic, COVID made it a household name. In March of 2020 alone, VoIP usage increased by an astounding 212%--and it’s shown no signs of slowing down ever since. With an estimated annual CAGR of 21.1% from 2022 to 2031, the VoIP market is expected to be valued at $327.5 billion by 2031.

Why then (as the below image shows) has consumer interest in the topic slowly decayed over time?

Because “VoIP” has expanded to include so much more than just voice calling in the past few years. Today, when consumers talk about “VoIP,” they’re really talking about unified communications as a whole: voice calling, video conferencing, team chat, business text messaging, collaboration tools, website chat, online faxing, and, more recently, AI-powered workforce management. Consumer interest hasn’t shifted away from VoIP, but “VoIP” has become somewhat of an outdated term.

Today, consumers are much more likely to refer to VoIP platforms as “omnichannel contact center solutions” or “unified communications providers” --and given everything that VoIP technology powers, it may be a more accurate term.

Now that you know what to look for in a VoIP telephone service, start comparing VoIP platforms to find the option that best suits your current and future business communication needs.

FAQs

Below, we’ve answered some of the most common VoIP questions.