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What is VoIP and how does it work?

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VoIP, or Voice over Internet Protocol, has been in the communications game for a while, but it’s still one of the most misunderstood technologies out there. Which is a shame because businesses, especially small and mid-sized ones, can really benefit from the savings it can offer.

The problem is that there’s a big question mark about the technology. And if you don’t understand it, it’s hard to visualize how it can help you.

With so much conflicting information about it on the internet, it’s not always easy to get a grasp of what VoIP technology can really do (and what it can’t do).

In fact, “VoIP technology” has become a catch-all phrase for other pieces of technology like cloud PBX and SIP. (They’re certainly related to VoIP, but they’re entirely different concepts altogether.)

In this post, we’ll look at:

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So, what is VoIP?

As we mentioned above, VoIP is the technology that allows you to make and receive calls over the internet. In fact, this is the telephony component of most top cloud voice solutions (like RingCentral):

VoIP technology

The goal: to replicate traditional telephones as much as possible—and, in many ways, improve on those traditional phones. It does this through packet switching technology and multiple internet protocols working together to duplicate certain telephone functions.

Sounds complicated right?

Let’s try to uncomplicate things by breaking down how VoIP works and how its many components work together.

Packet switching technology

So, we mentioned packet switching. This is actually how VoIP replicates traditional telephone networks or public-switched telephone networks (PSTN). Instead of copper-wired networks, VoIP uses computer networks to transmit calls.

These computer networks include local area networks, personal networks, and of course, the internet, which is the biggest computer network in the world:

Packet switching technology

What goes on is that voice data (yours in this case) is broken down into small packets, then it travels across various networks, including the internet, until it reaches its destination (the person you’re calling) where it’ll be assembled again to your voice data.

Then it goes in reverse: the voice of the person you’re calling travels back to you in the same order until you hear their voice on your end.

Types of VoIP protocols

To make all this happen, VoIP needs a little help. This is where internet protocols come in. Internet protocols are rules that you apply for routing data. This way, your voice and the voice of the person you’re calling will follow certain rules so it won’t get lost in the network.

The most important VoIP-related protocols are:

  • Transport Control Protocol (TCP) or User Datagram Control (UDP): These two are the most common delivery protocols used in VoIP. They dictate the behavior of how the data will be delivered—do you prioritize speed or quality?

If you want speed, UDP is the preference. What happens is that even if the connection isn’t established, it’ll deliver the data regardless. So, if you or the person you called has a bad connection, the voice data will still be delivered. Whether you receive it or not is the problem. That is why most IT people call it the “send and pray” method.

TCP, on the other hand, is all about quality delivery. It establishes a connection first before delivering data. It’s all about making sure that your voice data is delivered and received. By making sure the connection is established, however, speed is sacrificed.

  • Real-Time Transport Protocol (RTP): If TCP or UDP is the delivery guy, RTP is the lifter. This protocol determines how your voice data is carried over to the person you’re calling. It tells the receiving end the media type format of the audio (your voice), the security that protects your voice data, sender identification (the IP address where data is coming from), and more.
  • Session Initiation Protocol (SIP): We touched on this before, but SIP is the one responsible for emulating most of the functions of a regular telephone. If TCP/UDP and RTP are all about delivery and transport of your voice, SIP takes care of everything else like dialing, establishing a connection, and terminating the call.

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This is not VoIP!

Before we go defining what VoIP is, let’s go over what it’s not. Here’s a list of other technologies that are sometimes referred to as VoIP—but are actually not:

  • Cloud PBX: The technology works with VoIP, but it’s not VoIP. As you’ll see later on, VoIP is the technology that lets you make and receive calls over the internet. Cloud PBX, on the other hand, is the technology that manages all your incoming calls by routing it to the right person.
  • SIP: Session Initiation Protocol (SIP) is actually one of the most important components under VoIP technology. We’ll elaborate more on this later, but SIP is what’s responsible for establishing and ending VoIP connections. Basically, it’s the equivalent of dialing a phone number and ending a call.
  • WebRTC: VoIP and WebRTC (web real-time communications) both allow users to communicate from anywhere via the internet—but there’s one small difference. WebRTC enables communication through a browser like Chrome or Firefox, while VoIP does it via software or an app.
  • IP phones: The term has been used to describe both the technology (VoIP) and the hardware or software for it. For our purposes, IP phones or VoIP phones will refer to the hardware or software used to take and make VoIP calls. IP phones include both hard phones (physical phones) and softphones (software-based “phones”).

How does VoIP work?

Now that we learned the different components of VoIP technology, let’s look at how it all works together.

VoIP-to-VoIP calls

Let’s go over how VoIP-to-VoIP calls are made. For users, it’s about the same as how you make a regular phone call. The main differences are:

  1. The device you’re using is different because you need an IP phone or a softphone (VoIP app) to dial numbers.
  2. Many VoIP-to-VoIP calls don’t need phone numbers as long as both parties are using the same app. They just need to click on the profile of the person they’re calling and choose “call.” It’s usually the case for free VoIP apps.

In this table, you can see how your actions are translated by different components of VoIP:

How you make a call How VoIP does it for you in the background
You dial a number, or in some cases, you click on the profile of the person you’re calling in the app and make a call. SIP tries to establish a connection with the VoIP device of the person you’re calling.

Often, SIP establishes a connection with the server of your VoIP provider first, then the server connects the call to the device of the person you’re calling.

The person you’re calling answers. SIP successfully establishes a connection.
You guys talk. Your voices are broken down into packets of data, delivered either via TCP/UDP while being carried through RTP.

The packets of voice data are then assembled again when they reach the destination. All these happen back and forth in real time.

You say goodbye to the person you called. SIP terminates the connection.

VoIP-to-PSTN calls

What makes a VoIP service more viable to businesses is if it can also call traditional PSTNs, aka phone landlines, because let’s face it, most consumers are still using traditional carriers.

This is where VoIP gateways come in.

VoIP gateways are a component of SIP that allows for the conversion of your voices to be converted to the right audio format based on the device being used. In short, it converts digital voice into analog and analog voice into digital.

So how does it work?

If you’re making a call from a VoIP-enabled device like an IP desk phone, your digital voice will travel to the internet until it reaches the gateway. There, your voice will be converted to a multiplexed voice sample, which is the format used in PSTN-connected landline phones.

VoIP-to-PSTN calls

In return, the person you’re calling will be answering and their voice will be converted to digital once it passes through the gateway on its way to the desk IP phone on the other end.

VoIP-to-PSTN calls

Advantages of VoIP for small businesses

Now that we’ve covered what VoIP is and how it works, let’s find out why it’s great for small businesses.

If you’re running a small or medium-sized business, you’re looking at any way you can make the most out of something without spending too much.

And VoIP is all about that life.

With VoIP, you’re getting so much without having to spend as much as traditional systems. To get my point across, here are some of the ways VoIP is able to save you money.

You get unlimited calling… across the US and Canada

Unlike with traditional carriers where any calls made to a different area code is charged as a long-distance call, most VoIP providers let you call unmetered as long as the person you’re calling is within the United States (or our friendly neighbor, Canada).

Using VoIP with local phone numbers can be particularly useful for businesses that want to project a local presence in a specific area. It can also be beneficial for individuals who frequently make calls to a particular area code.

Here are some of the popular area codes you can choose from:


If you’re looking for unlimited international calling, RingCentral has unlimited call bundles that you can take advantage of. Interested in learning more about these? Book a quick demo to chat through your options!

Say goodbye to expensive hardware

Most VoIP-based communications solutions are cloud-based, which means that the service itself is stored in a remote data center owned by the provider—not your company.

What does this mean for you? It means all the infrastructure needed to support the service is already in place, and you don’t have to deal with the maintenance. All you have to do is subscribe, which leads us to the next advantage.

You only pay for it while you’re using it

Cloud-based solutions are usually offered via subscription or what’s commonly called software as a service (SaaS). What this means is that you can subscribe to the VoIP-based communications solution only while you need it. If you no longer need it or you’ve found a better alternative, you can simply unsubscribe.

One of the biggest perks of VoIP is that once you’ve unsubscribed, you won’t be stuck with expensive, old, and obsolete hardware and equipment, which is what usually happens to businesses that own their own on-premises systems.

VoIP is also super scalable

You want a phone service that adjusts to the size and capacity of your business. Because it’s cloud-based and you only need the internet to use it, you can use your business phone system no matter where you are. No need for new installations, no need for a new account. VoIP phone systems can connect multiple locations and a distributed workforce all under a single account.

These are just some of the ways VoIP can help your budget, but in most cases, VoIP-based communications solutions basically pay for itself.

🕹️ Get a hands-on look at how RingCentral works by booking a product tour:

Want to get the most out of VoIP technology?

Check out not only different VoIP-based phone system options, but also all-in-one platforms (you might’ve heard them called “unified communications as a service,” or UCaaS).

With tools like RingCentral, you’ll get HD-quality VoIP services, and also a whole cloud-based communications suite that includes team messaging and video conferencing—all in one platform.

It’s everything your small business needs to communicate more effectively. Sign up for a free trial and take it for a spin!

Originally published Mar 15, 2020, updated Apr 16, 2024

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