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What Are IP Phone Systems, How Do They Work, and Does Your Business Need One?

This article was updated on June 7, 2024

Reliable and efficient communication is crucial for any business. When a business makes the switch to an IP phone system, it fundamentally changes how it communicates. Leveraging the power of the internet, these systems offer features and advantages that are unavailable through a traditional system.


This article will explore IP phone systems in detail, including how they work and whether they’re right for you.

Photo of smiling employee talking on his headset to a customer or colleague.

What Is an IP Phone System?

An IP phone system, or VoIP phone service, uses the internet to transmit voice calls and other data. Audio is converted into digital packets, which are then sent over the internet. This offers many few advantages — like flexibility and integration with software — compared to regular phone systems that use analog signals and physical phone lines.

How IP Phone Systems Work

As mentioned, IP phone systems work by converting the audio from a call into digital data packets. These packets are then sent using the internet protocol (IP) to the intended receiver. After traveling across the internet, through routers and firewalls, the data is then reassembled into a voice signal. 

To use an IP phone system, you need an internet connection, a VoIP phone or app, and a subscription to an online phone service provider. How does this compare to a traditional, landline-based system? Let’s look at the key differences.


IP Phone Systems

Traditional/Landline Systems


Uses the internet to transmit voice calls as data packets

Relies on analog signals and physical phone lines


Lower costs due to reduced long-distance charges and minimal hardware requirements

Higher costs associated with long-distance calls, installation, and maintenance of physical phone lines


Easily scalable by adding new extensions or lines without expensive hardware upgrades

Limited scalability, often requiring additional physical lines and hardware installations


Dependent on the quality of the internet connection; susceptible to network problems or power outages

Generally stable, but subject to physical line damage or maintenance issues

Call Quality

High-quality calls with minimal latency are possible, provided there is a stable internet connection

Call quality can vary depending on the condition of physical phone lines and distance between callers

Advanced Features

Offers a wide range of features, such as call forwarding, voicemail-to-email, video conferencing, and integration with other business applications

Limited features, often requiring additional hardware or services at an extra cost


Allows users to make and receive calls from anywhere with an internet connection, enabling remote work

Tied to a specific location, with limited mobility options and making remote work difficult

Setup and Maintenance

Little hardware needed, so quick and easy to set up

Requires professional installation and maintenance of physical phone lines and equipment


Adaptable to evolving communication technologies and trends

May become outdated as communication technologies advance

As you can see, IP phone systems offer a number of advantages over traditional systems. They provide cost savings, scalability, and many advanced features that cater to the needs of modern businesses.

However, the quality and reliability of your IP phone system depends on the quality and reliability of your internet connection. If you don’t have a stable, high-speed internet connection, then a landline-based system may be able to provide better calls.

What Is Voice over Internet Protocol (VoIP)?

Voice over Internet Protocol is the technology that enables IP phone systems to function. The purpose of VoIP is to convert voice into digital data packets, which can then be transmitted over the internet via a set of protocols that have been standardized specifically to accommodate voice, video, and other multimedia content. 

Benefits of Voice over IP Phone Systems

VoIP phone systems offer many benefits that make them an attractive solution for any business, no matter its size. Let’s take a quick look at some of the most important benefits.

Easier (and Often Cheaper) To Install and Set Up

One of the biggest benefits of a VoIP phone system is just how easy they are to install. Unlike a traditional phone system that requires extensive wiring and hardware, a VoIP system can be installed within a matter of minutes.

You’ll either receive plug-and-play devices from your VoIP provider or download their app. Once that’s set-up, you can login and start making calls.

Furthermore, the initial cost of a VoIP system can be substantially less than a traditional phone system. Without the need for physical phone lines or an expensive PBX unit on-site, you don’t have to pay for expensive installation or hardware.

Less Ongoing Maintenance

Because a VoIP phone system is software-based and hosted in the cloud, the ongoing maintenance and upkeep are much less. This means that your VoIP provider, not you, is now responsible for maintaining and updating the system. You don’t have to spend time and money on hardware repairs or handling system downtime. Instead, you can focus on running your business.

More Flexible and Mobile

Gallup has spent the past few years tracking the popularity of hybrid work, and it’s clear it’s here to stay. With only 20% of remote-capable employees working fully onsite and 30% being entirely remote, it’s clear businesses need solutions that enable flexibility and mobility. 

Luckily, with a VoIP system, calls can be made and received from anywhere there is an Internet connection — and you don’t even need special hardware, thanks to softphones and mobile applications.

This flexibility means huge benefits for businesses that operate a remote or hybrid working model, enabling employees to stay connected to their colleagues wherever they are and fostering a collaborative working environment that drives productivity.

Better Scalability

The second major benefit of VoIP phone systems is their scalability. As your business grows, you can add new extensions or lines to your system without having to bring in electricians. Instead, you simply adjust your subscription to cover it and your provider takes care of the rest.

Similarly, you can cut off lines or extensions at any time without having to worry about paying for things you aren’t using or getting out of long-term contracts. This means you can optimize your communications infrastructure according to what you need and can afford at a given time.

Greater Access to More Advanced Features and Integrations

Being software-based, IP phone systems allow for a host of productivity and customer experience enhancing features and integrations not often found with traditional phone systems.

Some of the advanced features commonly found in VoIP systems include:

  • Call forwarding and routing

  • Voicemail-to-email transcription

  • Video conferencing and screen sharing

  • Call recording and analytics

  • Interactive voice response (IVR) systems

  • Integration with CRM and other business applications

These features and integrations allow you to create an efficient, customer-centric communication environment and, ultimately, better business outcomes.

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IP Phone System Cost Considerations

Now that you've seen the numerous benefits of IP phone systems, you might be wondering about the costs you‘re likely to incur. While VoIP pricing can be highly variable and will depend on many factors, here’s a run down of some of the main cost drivers that might influence the price.

Cost Driver


VoIP Provider

Different providers offer various pricing plans, features, and service levels, so it's crucial to compare options and select a provider that aligns with your business needs and budget.

Number of Users

The number of users in your organization will directly influence the cost of your IP phone system. Most providers offer per-user pricing, so the more users you have, the higher the monthly cost. However, some providers may offer volume discounts for larger organizations.

Required Features

Basic plans typically include standard features like call forwarding, voicemail, and caller ID, while more advanced plans may include video conferencing, call recording, and CRM integrations. Assess your business needs and choose a plan that offers the features you require without overpaying for unnecessary extras.

Hardware and Equipment

While IP phone systems generally require less hardware than traditional phone systems, you may still need to invest in VoIP-compatible phones, headsets, or other equipment. Some providers offer hardware as part of their service plans, while others require you to purchase equipment separately.

Setup and Installation

The setup and installation costs for an IP phone system can vary depending on the complexity of your network, the level of support you require, and whether you want to use particular hardware. Note that some providers offer free or low-cost installation, while others may charge a one-time setup fee. If you have a complex network or require extensive customization, you may need to factor in additional installation costs.

Maintenance and Support

Some providers include maintenance and support in their monthly service fees, while others charge extra for these services. Consider the level of support you require and factor in any additional costs for maintenance and support.

When selecting an IP phone system for your business, it's essential to consider the long-term costs and benefits rather than just the initial setup cost. Some providers will offer very low upfront costs, but charge much more in monthly fees or lack access to features that your business needs.

Make sure you’re getting the best deal by analyzing your business needs, comparing different providers and plans, and figuring out all the costs associated with installing and maintaining an IP phone system.

It's also worth noting that despite the costs involved, VoIP for small businesses can still be a cost-effective solution compared to traditional phone systems. The advanced features offered by IP phone systems can contribute to increased productivity, a better customer experience, and, ultimately, better business results.

Other Considerations When Choosing an IP Telephone System

Cost is, of course, a crucial consideration when it comes to choosing an IP telephone system for your business. However, it’s not the only one. When choosing a VoIP provider, you need to make sure the service offers decent sound quality, reliability, and some level of security and support to ensure that your business communication needs are met. Here are some of the main things to consider:

Available Features and Add-Ons

Each provider offers different features and add-ons, so it’s a good idea to evaluate your business needs and look for a provider that will offer the features you need — and not charge you for those you don’t!

Common features include:

  • Advanced call forwarding and intelligent routing options

  • Voicemail-to-email transcription for easy message management

  • Customizable auto-attendant and interactive voice response (IVR) systems

  • High-quality conference calling and video conferencing capabilities

  • Comprehensive call recording and analytics for performance monitoring

  • Seamless integration with CRM and other essential business applications

Remember to account for future needs as well as your present requirements to make sure that your provider can scale and adapt as required.

Reliability, Security, and Compliance

Reliability and security are important features of any communications system. A good IP phone system provider should be able to provide high uptime guarantees, a robust network infrastructure, and redundant systems to minimize downtime.

Security and compliance are also key factors, especially if your business collects sensitive data or is required to comply with industry regulations. Make sure your provider offers strong security, such as encryption, secure voice protocols, and regular security audits.

For example, Vonage invests heavily in security and privacy measures and maintains a wide range of compliance certifications across our product lines. They include ISO 27001, PCI-DSS, SOC, HITRUST, and CSA STAR, to name just a few.

Ease of Set Up and Use

You don’t want to spend a lot of time training your team on a new, complicated solution, so make sure whichever provider you choose has user-friendly interfaces, intuitive call management features, and easy-to-use mobile and desktop apps.

Some providers offer plug-and-play devices — you simply connect them to your network and you’re done. Others provide web-based portals for administrators to add users and configure settings without requiring extensive technical knowledge.

Support Offered by Your Provider

Finally, consider the extent of support that your provider offers. Look for providers that offer comprehensive support options, such as:

  • 24/7 phone and email support

  • Online knowledge bases and tutorials

  • Live chat support

  • Dedicated account managers

  • On-site support for complex issues

Having access to reliable and prompt support can prevent downtime, ensure your IP phone system is working optimally, and help you maximize your productivity.

But that’s not all.

Your unique business needs and requirements will often provoke the need for other considerations. So beyond those mentioned so far, here are some bonus factors that your unique use case might bring up:

Network Infrastructure and Bandwidth Requirements

Before investing in an IP phone system, you should conduct a thorough analysis of your current infrastructure and bandwidth availability. Take the time to:

  • Evaluate your current internet connection speed and reliability

  • Determine the number of concurrent calls your business requires

  • Assess the need for network upgrades or dedicated VoIP bandwidth

  • Consider implementing Quality of Service (QoS) to prioritize voice traffic

Compatibility With Existing Systems and Hardware

You should check whether your preferred IP phone system is compatible with your current systems and hardware, such as:

  • CRM software and other business applications

  • Headsets, conference phones, and other audio equipment

  • Existing VoIP phones or softphones

  • Fax machines and other legacy systems (if necessary)

Choosing a provider that offers seamless integration and compatibility can save you the unneeded expense of having to replace everything to suit a new system.

Provider's Reputation and Track Record

Finally, research the provider's reputation and track record in the industry. Look at publicly posted reviews and testimonials, as well as case studies from businesses similar to yours. Take note of any industry awards they’ve received, as well as how long they’ve been in the market.

By picking a reliable provider with a long history of success, you can be confident that the service and support they offer will be of a high standard and suitable for the needs of your business.

Boost Collaboration and Productivity With an IP-Based Phone System

As you’ve seen by now, an IP-based phone system will allow your business to get a step ahead of the competition. By providing unparalleled flexibility and mobility, your team can work from anywhere with reliable internet service, increasing productivity and collaboration. Plus, it’s easy to scale as your business grows.

If you approach it intelligently and choose a vendor suited to your needs, this technology can help you unlock your marketplace advantage, while lowering your everyday costs.

Contact a Vonage expert today to learn more about getting the right solution for your business.

Scott Rigdon bio
By Scott Rigdon Sr. Content Writer

Scott creates effective and engaging blog articles, web pages, email sequences, and other content for Vonage. His journalism degree, editing experience, and advertising background give him a unique perspective on content structure and strategy. When he's not working, Scott enjoys reading, movies, and helping his wife restore their mid-century home. Oh, and sandwiches.

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