April 30, 2024

What is PBX?

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Key takeaways

  • A cloud-based (hosted) PBX system is easier to implement and less expensive than an on-premises PBX phone system.
  • A hosted PBX phone system using VoIP technology offers more flexibility and scalability than other PBX phone solutions.
  • Hosted PBX service providers offer different advanced features, and some providers offer faxing capability, while some do not but can support faxing with additional analog-to-digital equipment.

A Private Branch Exchange (PBX) phone system is an ideal solution for small businesses due to the lower monthly cost than a traditional Plain Old Telephone System (POTS) or landline phone, which includes equipment infrastructure and maintenance costs. A modern PBX phone solution eliminates maintenance, copper cabling, and long-distance call costs. These updated PBX phone systems for small businesses offer improved flexibility, scalability, and advanced communication features for calls and internet data options unavailable in a traditional POTS phone system. 

The article aims to help small businesses understand how PBX technology works, the available PBX options, and how to select the best PBX solution.

What is PBX?

A modern PBX phone system can be a cloud-based or on-premises phone system using Voice over Internet Protocol (VoIP) technology, and a cloud-based PBX solution is also known as a hosted PBX solution, which a service provider supports. 

An on-premises PBX solution is located at the organization’s location and maintained by that organization. A cloud-based PBX or an on-premises phone system uses the internet to make and receive calls. A PBX phone system can make or receive calls from POTS phones using a VoIP gateway that converts analog signals to digital data packets before traversing the Public Switched Telephone Network (PSTN) used by POTS phones. 

The VoIP gateway is located and maintained in the service provider data center for cloud-based PBX phone systems. At the same time, on-premises PBX solutions and VoIP gateways are located onsite and maintained by the organization. 

How does a PBX phone system work?

A hosted PBX system uses VoIP technology to make or receive calls over the Internet. It connects all POTS and VoIP phones to the PBX phone system. When a call is made using a PBX phone system, the voice data is converted to digital data packets by the VoIP phone. 

If the call is from a POTS phone, it’s converted to digital data by the modem. If the call is from a mobile phone, the analog voice signals are converted to digital data packets using an analog-to-digital conversion (ADC). The digital data packets from each type of phone are then transmitted over the internet and converted back into analog voice data using a coder-decoder device (codec), allowing a conversation to occur using the connected phones. 

Figures 1 and 2 show the topology diagram of a PBX phone system, and the second figure is an example of how a PBX phone system executes a call to a POTS phone in another office.

Cloud-based(hosted) PBX diagram.
Figure 1
Outgoing call from corporate office using a PBX phone system.
Figure 2

How is a PBX using VoIP technology different from traditional POTS phone systems?

Modern PBX systems operate differently from traditional POTS phone systems that use the PSTN. Plain Old Telephone Service uses circuit-switch technology and sound waves that are converted into electrical signals and sent to a drop cable. The drop cable forwards the signals to a central or main phone company office via an aerial cable. Switches in the central office decode the signals to determine their destination, which can be several locations depending on whether the call is local, continental U.S., or international.

The central office breaks the call down into a single frequency and distributes the frequency to all its phones, allowing only one phone to pick up on that particular frequency. Finally, the analog signals are decoded to reconstruct the original sound on the receiving end, allowing a conversation to occur.

Types of PBX systems for small businesses

Private Branch Exchanges are an excellent phone system for small businesses for various reasons. To gain the most out of a PBX system, you must be sure the best type of PBX solution is selected to meet all your business needs and address any unique requirements.

Functionalities and capabilities chart of different types of PBX phone systems

Types of PBX System Communication Media Scalability Mobility Costs Integration Capable In-house Supported Comments
Traditional PBX or PSTN Analog media $$$$
On-premises PBX Unified Communication (UC) (i.e., analog and digital media & devices) Some are scalable Yes, but limited $$$ Mobility for cell phone calls is limited
Cloud-based PBX Unified Communication $
Hybrid PBX UC & Session Initiation Protocol (SIP) Trunking Yes, but limited $$ Yes, but set up a Service Level Agreement with (SLA) service provider Flexible due to cloud and VoIP functionality. Good for remote work.
IP PBX IP and UC $ or $$ Depends on where the system is hosted IP PBX phone system can be cloud-based or on-premises

Other considerations for a PBX solution are upfront costs, cybersecurity protections, data recovery, and the availability of advanced features. All the PBX solutions cost less than a traditional POTS phone system, but the most affordable PBX solution is a cloud-based solution. On-premises PBX phone systems cost more, but some businesses select this option because it gives more control and security. However, cloud-based PBX systems are known for offering better cybersecurity protections than on-premises PBX solutions.

Key features of a PBX system

One of the primary benefits of a non-traditional PBX phone system is the availability of advanced features that are unavailable in landline systems. A cloud-based PBX solution comes with a built-in set of advanced features as part of a package PBX solution, and an on-premises PBX solution will provide a limited set of advanced features compared to a cloud-based PBX phone system. PBX phone systems’ advanced features significantly improve businesses that operate customer service and call center departments.

Call forwarding

The call forwarding feature allows users to redirect to a different number, which is also known as call diverting. This feature can help salespersons never miss a call while away from the desk.

Call monitoring

This feature is a management option that allows management staff to listen to a call to help a customer service representative improve their interactions with a client.

Auto attendant

The auto-attendant option is a feature that allows a caller to switch to another extension without assistance from a person in an office or call center.

Call routing

Call routing automatically puts calls in a queue. It uses a set of established rules and criteria to direct a call to a specific person or group before the call is picked up on the other end.

Call analytics

Call analytics uses artificial intelligence (AI) technology to collect data on inbound phone calls. This feature can collect phone numbers, caller identities, and marketing information. Marketing firms can use call analytics to make better budgeting decisions or help lower the conversion rate.

Call recording 

This feature, also known as phone recording, is used in various scenarios. Call recording can help a business remember the facts of a phone conversation or keep track of any verbal agreements made during a phone conversation.

Call screening

Call screening uses caller ID to allow a user to accept, reject, or send a call to voicemail. It helps reduce unwanted calls that can be a distraction.

Voicemail to email transcription

The voicemail-to-email feature sends a voicemail to a person’s email address.

Virtual phone numbers

Virtual phone numbers can be used by any phone in an office, including softphones, when the software is installed on desktops, laptops, or mobile devices.

Audio conferencing

Audio conferencing allows users in different locations to conduct an audio meeting without participants all being in one location. 

Auto dialer

The auto-dialer feature can automatically dial the phone number for the person making the call to the callee.

Group ringing

This feature allows companies to call multiple employees or salespersons simultaneously, allowing the available person to answer the call. The group ringing feature improves the customer experience and satisfaction.

Automated phone system

This feature, also known as an Interactive Voice Response (IVR), allows incoming callers to listen to a pre-recorded message without speaking to an actual person. IVR feature can redirect calls to the correct section by providing menu options in the recorded message.

Team chats

Team chats let company employees collaborate and interact on a dashboard where the messages are kept in one location.

Video conferencing

Private Branch Exchange (PBX) phone systems can make video conference calls using the Internet, provided the connection is sufficient.

SMS/MMS texting

Using VoIP technology and the internet, PBX phone systems can send text messages.

How to choose a PBX system

Many factors must be considered when selecting a PBX phone system. For example, if a business has two offices and one location has suspect and unreliable internet connectivity, the company could benefit from selecting a hybrid PBX phone system to ensure reliable communication with the other office. 

What is a company’s projected future growth, or does the company need to be in regular communication with employees who are constantly off-site providing a service to customers? A small business that plans on future employee growth needs to consider a scalable PBX phone system as new employees are hired. A cloud-based PBX system is highly scalable and can meet the demands of a company with employees who are regularly off-site.

Small Business Example: A small business with 10 employees using a hosted PBX phone solution can expect to pay approximately $1,000 for handsets and a one-time licensing cost. For an on-premises PBX solution, 10 users at a small business will pay about $1,500. Adding five employees for a cloud-based PBX solution will cost about $500, and adding five users will cost approximately $750 for the on-premises PBX solution. Additionally, an on-premises PBX solution has a higher upfront cost compared to a hosted PBX solution. As a business grows, the company can look for a more affordable plan that costs less per user.

Other important considerations that should not be overlooked are expected call volume, guaranteed uptime, customer service availability, data recovery, redundancy, and VoIP cybersecurity best practices. Ensuring these items are covered in a comprehensive Service Level Agreement (SLA) holds the service provider accountable to meet the terms listed in the SLA. 

To fully take advantage of a PBX solution, you need to know what advanced features are provided and what features will best improve your overall business operations. For example, if you still need faxing capabilities, you must explore service providers offering that option as an advanced feature. 

Service providers may have different names for each advanced feature, providing an expected functionality. Experiment with demos and free trials to ensure a specific advanced feature meets your needs. You can also talk to other businesses that use a PBX solution you are interested in to get an objective opinion about a PBX system and read customer reviews. 

Also read: What is a Hosted VoIP? Complete Guide for 2024

Top PBX software recommendations

The top PBX software products use VoIP technology and offer similar functionality with slight differences, but they are all effective PBX software solutions. RingCentral, Ooma, and Nextiva are all popular PBX software solutions.


RingCentral is a superb product for small businesses that have limited resources. This cloud-based PBX software solution enables small businesses to send and receive calls and text messages to multiple devices and offers audio and video conferencing options. RingCentral boasts a 99.999% reliability rate, including five years of five 9s in SLA contracts. RingCentral’s basic user plan starts at $20 per month if paid annually.

RingCentral has good call management features that provide call blocking, logging, call waiting, caller ID, IVR, and automatic call distribution (ACD) that route calls to any available call agent or put them in the correct call queue.


Ooma can be used by any size business while being affordable for small businesses. The Essentials plan starts at $19.95 monthly. Small companies do not have to commit to a long-term contract, allowing them to avoid being locked into a long-term contract. 

As a cloud communications platform, Ooma is a solid choice for small businesses with remote teams, including virtual receptionist, extension dialing, and hold music features. Ooma offers unlimited calling to the U.S., Canada, Puerto Rico, and Mexico. Ooma allows a business to keep existing phone numbers or select new phone numbers at no additional cost. This PBX solution offers fax online and intercom services.


Nextiva is another cloud-based communication platform using VoIP technology for phone services, text messaging, and video conferencing. This platform provides unlimited calling throughout the U.S. and Canada. Additionally, Nextiva offers faxing at no additional cost. Nextiva provides three service tiers: Essential, Professional, and Enterprise. The Essential plan starts at $23.95 a month per user.

Nextiva is designed for small businesses and has the tools and features to manage text and voice communications. This PBX product offers free online faxing and video calls for up to 45 minutes, including a downloadable desktop application called NextivaONE, a mobile app compatible with iOS and Android devices.

Finding the right PBX solution for your business

There is no one specific way to evaluate PBX phone systems. Still, it is highly recommended that requirement gathering occurs in an organization before a small business starts looking at PBX phone solutions. Collecting requirements for a PBX phone system provides you with a complete list of the features you want in a PBX phone solution. A comprehensive list can trigger questions that refine your requirements and lead to selecting the best PBX phone system out of three you might be considering for your business.

Featured Partners: VoIP Software

1 RingCentral Office

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RingCentral is a business VoIP provider that offers cloud-based communications including message, video, phone, and collaboration features. It offers a number of different tools that you can buy as standalone products or as part of a unified communications platform. Some features include call screening, internet fax, call forwarding, visual voicemail, multi-level Interactive Voice Response (IVR), video conferencing, and team collaboration.

Learn more about RingCentral Office

2 VirtualPBX

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VirtualPBX lowers your business communication costs by 40%-80% with our award-winning voice and text messaging services. Our phone plans boast 99.999% reliability, backed by 24/7 support 365 days a year. Experience seamless connectivity and the industry's best customer service. VirtualPBX is your go-to for cutting-edge small business VoIP solutions.

Learn more about VirtualPBX

Frequently Asked Questions (FAQs)

ATA devices connect analog devices like fax machines or phones to the network, allowing users to communicate over the internet using analog equipment.

You will typically need more than 10Mbps.

Hosted PBX phone systems are less expensive than on-premises because hosted PBX systems do not require any onsite hardware and installation costs. The service provider hosts all hardware in their own data center.

Yes, but you will need an ATA device to connect a POTS phone to access VoIP services.

No, though both are phone systems, they are different in the communication devices they can use. PBX phone systems using VoIP technology can use analog, digital, and VoIP phone devices. A VoIP phone system uses the internet and transforms audio signals into digital data packets using VoIP phones, but POTS phones require additional technology.

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