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

Learn what a PBX is, the benefits of using it, how it works, and which type of private branch exchange is best for your organization.

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

This guide breaks down all the essentials you need to know about a modern PBX solution: what it is, how it works, business benefits, and how to decide if it’s right for your organization.

What Is a PBX?

A PBX (Private Branch Exchange) is a private telephone system that connects users within an organization (extension-to-extension) and routes external calls through the public phone network or the internet.

It’s made up of hardware (or software, in modern systems) that links a company’s phones to the outside world, and it also provides advanced features like call routing, forwarding, and management for both inbound and outbound calls.

Setting Up Your Telephone Network With a PBX

Setting up a PBX is no small task. A company must enlist the help of a systems administrators with decades of telecom experience. Plus, you need the physical space in your office to put the PBX system, like a closet or server room.

The traditional telephone system is known as the Plain Old Telephone Service 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 Public 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.

So people thought: There has to be a better way! And there is.

PBXs allow a business to run its own internal VoIP phone service, so employees can call each other through individual extensions without tying up outside lines. For external calls, the PBX routes traffic through a smaller pool of shared phone company lines, which reduces costs. Top PBX systems can manage voicemail, auto attendants, and recorded messages.

PBX analogy: computer networks

You might have heard long ago that the internet was running running out of IP (internet protocol) 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 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.

A modern alternative

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, we have modern PBX systems that 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.

The purpose of a PBX

The primary purpose of a PBX is to serve as a business phone system.

It allows for the internal management of phone calls within a smaller area, such as an office or business. A PBX can handle any feature like voicemail, auto attendants, and recorded messages, providing a comprehensive phone system for the organization.

In contrast, the PSTN is a public phone network that connects calls between different providers and handles the routing of calls on a larger scale. It’s not specifically designed for internal business phone systems like a PBX.

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.

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.

Here are the top reasons why businesses use a PBX:

Call management – Manage and complete calls on a pre-programmed schedule. For example, a medical office could route after-hours calls to an answering service. Operators can restrict or permit international dialing as needed to avoid high costs.
Call transfer – Easily transfer calls between users and departments without dropping the call. This is especially useful for customer service and sales teams.
Custom greetings – Record customized greetings and hold music to create a professional image and alert customers to promotions or issues.
Call centers – PBX systems enable call center functionality to manage inbound/outbound calls and distribute them to agents. A cloud PBX can scale to handle high call volumes.
Multi-location connectivity – Connect multiple offices on the same phone system so employees can communicate seamlessly across locations.
Reporting & analytics – Many modern PBX systems provide detailed reporting on call activity, agent performance, and more. This data helps businesses optimize their communications.
Unified communications – A PBX can integrate with other communication channels like video conferencing, chat, and email to provide a seamless user experience.
Cost savings – VoIP-based PBX systems can significantly reduce costs compared to traditional phone lines. Businesses only need an internet connection instead of a separate voice infrastructure.

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

As business applications have migrated to the cloud, so have PBXs. PBX phones exist in a few varieties to fit just about any business need.

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.

For the startup, small business, and even enterprise company in 2025 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.

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

1. Hosted PBX

A hosted PBX, also called IP PBX, VoIP PBX, cloud PBX, virtual PBX, is often included as part of a unified communications platform that lets you connect and route internal and outside lines in a single system.

IP PBX is a central system that switches and routes calls between the telephone network and VoIP users.

With a hosted PBX system, you can manage your employee’s phones 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 a computer, cell phone, and IP phone.

Generally, a modern IP PBX system offers additional features you won’t find with landline systems. 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.

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On-premises PBX systems

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

An on-premise PBX system requires on-site telecommunications equipment 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. Costs can quickly add up, especially for larger companies.

Whereas once the only option was an on-premise PBX system, today they’re limited and cost-prohibitive for most businesses.

The underlying technology that PBX systems were built on—landlines—is becoming less relevant each year. A traditional PBX system lacks many of the advanced features you’ll have with a modern business telephone system.

They’re also more vulnerable to security threats.

According to the FCC, some phone scams target innocent staff using a legacy or traditional PBX system to relay expensive international calls. On-prem systems are only as secure as the physical location they reside in.

As a business owner, ask yourself, “Does our PBX yield the most value every year, and 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 Voice over IP telephony or VoIP.

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.

SIP Trunking

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, hybrid systems are still limited by the requirements of an on-premises 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.

Now, to sum up, here’s a comparison table of hosted PBX vs. on premise PBX systems:

Feature	Hosted PBX	On-Premise PBX
Upfront costs	Low, pay-as-you-go model	High, large capital investment
Ongoing costs	Predictable monthly fee	Unpredictable maintenance/upgrade costs
Scalability	Easily add lines & features	Requires more PBX equipment/wiring
Mobility	Supports remote work	Limited or no mobile functionality
Integrations	Integrate with CRM, apps	Limited integration options
Technology	Modern VoIP/cloud-based	Aging digital/analog PBX
IT support	24/7 vendor handles	In-house IT team
Disaster recovery	Built-in failover & redundancy	Requires manual backup/restoration
Security	Vendor adheres to strict standards	Risk of unsecured physical access
Future-proofing	Automatic updates & new features	The vendor adheres to strict standards