Comparing Total Cost of Ownership: Premise vs Hosted IP Phones

When choosing between a cloud-based technology and an on premise technology, it’s usually necessary to weigh up-front costs vs. recurring costs over a period of time.  Premise based and hosted IP Phones are no different. Invariably, you’ll pay a bit more on a monthly basis for hosted IP phones, but when you consider the up-front and hidden costs of premise-based phone systems, you’ll usually save with a hosted solution over time.

Polycom VVX-400 Hosted IP PhonesTo help you do this analysis for your business, we’ve developed a cost comparison for a fictitious company, Widgets R Us.  In this analysis, we use an aggregate of industry-wide cost estimates for up-front installation, training, licensing and equipment costs, as well as actual Hosted PBX phone pricing data.

The Widgets ‘R Us Scenario

The primary business office of Widgets ‘R Us is replacing its phone system. Currently, they employ a legacy business phone system with traditional key system phones.  This company produces specialty warm winter hats, and this office handles inbound telephone sales, customer support, and is home to the owner and the comptroller.

The office currently has 7 work stations:

  • Owner
  • Comptroller
  • Shared Admin Assistant
  • A/P Clerk
  • 3 Customer Sales / Service reps

Widgets ‘R Us has a manufacturing/distribution plant located 5 miles from the business office.  There is 1 work station at this location. Web orders for the product are processed at the plant, and inbound phone orders are passed on to the plant for processing.

Each user has different requirements for their phone IP business phones because of their daily workflow. The table below outlines how telephone requirements vary by user at Widgets ‘R Us:

Desired Phone Features

Position Local / LD Calling Auto Attendant Conf. Calling Call Transfer Telecommuting Call Queuing VM to Email Voice Mail
Sales / Service Reps Y Y Y Y Y Y
A/P Clerk Y Y Y Y Y
Admin Assistant Y Y Y Y Y Y Y
Comptroller Y Y Y Y Y Y
Owner Y Y Y Y Y Y
Mfg. Distribution Plant Y Y Y Y

The company will have a published phone number for customer sales/service. When a rep is available to answer, he or she will direct the call. When staff is busy, the incoming call will go to an auto attendant. The 4 non-sales / service staff including the plant will have individual inbound phone numbers.

How the Total Cost of Ownership Stacks Up for Premise and Hosted IP Phones

This table itemizes cost for both premise-based and cloud hosted IP phones. Please note: included pricing for a 7-year life cycle is representative of an industry-wide aggregate and is not specific to any one provider product brand.

One Time Expenses

Premise Phone Estimated Cost Premise Phone Cost/User over 7 Years Hosted IP Phones Estimated Cost Hosted IP Phone Cost/User over 7 Years
IP Phones1 $1,600 $200 $1,600 $200
PBX Equipment and License2 $5,000 $625
LAN3 $1,000 $125
Installation and Training4 $2,100 $262
Subtotal Non-Recurring $6,600 $825 $4,700 $587

Recurring Expenses

Premise PBX :  1 Year Premise PBX: 7 Year Premise PBX Cost / User: for over 7 Years Hosted IP Phone 1 Year Hosted IP Phone 7 Years Hosted IP Phone Cost per User over 7 Years
Hosted Phone Service5 $2,200 $15,400 $1,925
Teleconnectivity6 $2,600 $18,200 $2,275 $2,000 $14,000 $1,750
PBX Licensing, Maintenance Contracts, software/firmware/hardware upgrades7 $12,000 $84,200 $10,500
Subtotal Recurring $14,600 $102,200 $12,775 $4,200 $29,400 $3,675

Combined Recurring and One-Time Costs

Premise Based Phones Hosted IP Phones
Year 1 $21,200 $8,900
7 Years $108,800 $34,100
Total Cost/User $13,600 $4,262

For a small to mid-sized company, it’s easy to see that hosted IP phones can be a real money saver when you consider all the costs.  Learn more about hosted IP phones, by checking out our Hosted PBX service.


  1. Cost of the actual telephones (one time charge) Estimate based on an aggregate of industry data
  2. Premise PBX hardware and initial and initial software license (one time charge) Estimate based on an aggregate of industry data
  3. On-Site routing equipment (one time charge) Estimate based on an aggregate of industry data
  4. All installation and training (one time charge) Estimate based on an aggregate of industry data
  5. Includes all hosted features: auto attendant, and custom functionality
  6. For PB system includes 5 copper phone lines, (2) 2Mbps Internet connections and 1 SDSL Local Loop
  7. For Hosted system includes 3 copper phone lines, (2) 2Mbps Internet connections and 1 SDSL Local Loop (both reflect annual total of MRC) Estimate based on an aggregate of industry data
  8. Estimate based on an aggregate of industry data

This comparison does not factor long distance calling charges, conferencing charges, or e-faxing due to the wide range of options and billing methods throughout the industry.

Check Out Our Guide to Business Phone Systems