Why Hosted PBX providers are ripping you off

I should know. I ran one for 4 years.

I actually have run two. In 2009 I founded a small Internet Service provider. The company did well and grew quickly serving very small businesses (5-15 employees). As the business matured we naturally expanded our service offering away from strictly Internet access and launched a business VoIP phone service. In about 12 months our revenue from the phone service had surpassed our core Internet access business. What was going on? We had entered a fiercely competitive market (just Google “Business VoIP”) offering nothing special compared to our competition and business was booming.

Was this the business opportunity of the century? It was looking that way.

Because we were a small company I had the opportunity to handle several of our key accounts myself. Through this process I always asked 3 questions.

  1. Who is your current phone company?
  2. Why are you switching?
  3. Who else did you consider, and why didn’t you choose them?

The answers varied, but there were some clear themes that emerged. Our customers generally fell into one of a few buckets; Businesses switching from the traditional phone companies because they heard VoIP was cheaper, New businesses needing to get a phone system or virtual number for the first time, or businesses switching from another VoIP provider.

For the businesses looking to save money, generally this was all smoke and mirrors. The VoIP industry, with only a few exceptions, is pretty uniform on pricing, and for the small businesses we worked with the cost savings compared to “traditional” phone companies was only a few dollars per month.

For a business needing phone service for the first time, most were drawn to VoIP because of price (see above), features, and some combination of aversion to the big telcos and wanting to use a high-tech solution.

What was most interesting were the customers switching VoIP providers. These customers generally had a bad experience with the current provider, either with the technical aspects of the service (complicated setup, quality, ease of use) or dealing with customer service. Many felt like they were the victim of a bait and switch after discovering dozens of hidden charges, equipment fees, and activation charges.

Any industry that can get away with this and still be thought of as the more affordable option is broken.

For example: Our standard Hosted PBX product was sold by “seat” meaning you paid a flat rate per physical phone, or employee. Our average monthly revenue per seat was around $18 and required a one year contract. Our raw cost to provide this was less than $2 per month. that’s a 900% markup! The other problem was if we tried to charge much less we found that customers wouldn’t buy because they assumed there was something inferior about our service. “Why are you so much cheaper than X? Because you’re not as good?” No amount of reasoning could convince them otherwise.

So the common business logic would state that the industry is pricing based on value to the customer. The customer is happy to pay this amount because the provider is offering a service that they can’t get anywhere else, and the value that the business gains from having the phone system is worth the cost.

But I don’t agree. VoIP phone service at its core is a commodity, is easily replaceable and has a low barrier to entry. There are dozens of providers offering essentially the same stale service, most with poor customer service and countless hidden fees. Yet somehow they all get away with charging a 900% markup. How? The answer is big marketing budgets.
The flood of marketing that the big players in the VoIP industry unleash has trained most buyers to compare Hosted PBX service to an analog phone line. But this isn’t fair. If you actually compare most VoIP hosted PBX providers to a traditional PBX platform you will see that the features aren’t that different, and the total cost of ownership can actually be higher for the VoIP option despite the fact that the actual cost to provide these services is close to nothing. Most marketing pitches also focus on how advanced the provider’s technology, and as a result, how reliable the service is.

After 3 years of working with our customers I saw that very few companies had the kinds of problems that needed to be solved with 40 year old PBX features and solutions and most didn’t realize that the “quality guarantees” required very expensive dedicated MPLS circuits or T1’s for a few hundred dollars a month. But once we explained some of the creative, outside the box things that could be done with Voice and SMS service that didn’t involve “pressing 1 for sales…” I could see the gears turning. With a few lines of code you can integrate your phone system with your website, and link your CRM and shipping data so a customer can call, get their order information and a real time update on their shipping status without your phone ever ringing for example. They didn’t even know these options existed, and if they did they thought it would cost too much. This was the inspiration we used to launch our next generation platform. We called it SimpleVox. SimpleVox aimed to break the ITSP (Internet Telephone Service Provider) mold. I didn’t want to build a “Hosted PBX” that just copied the features of an old dinosaur PBX. I wanted to provide a platform where companies could solve their business problems with telecom, a system to let companies build their own phone services and integrate with their existing applications. Because we didn’t try to compete with traditional ITSP’s we could charge a fair price, not a flat rate per phone, and our customers realized that the other guys were ripping them off.

But for some reason SimpleVox never gained the kind of traction I expected. I don’t think the problem was lack of utility. The customers that we had love the product and are doing some really cool stuff. I think the problem was lack of awareness. Most companies don’t even think these kinds of things are possible, so they aren’t looking for a solution. The problem is education. Companies like Twilio and Plivo are growing by leaps and bounds because they’ve turned voice into a an easy to implement API. This kind of technology isn’t new at all, it’s actually how most of our really expensive carrier grade IVR platforms worked. What is new is that it’s now accessible to anyone for just a few bucks per month and they are evangelizing it. Now that these types of services are available to the public at large at a very low cost there isn’t a need for the old guard of VoIP providers and “hosted PBX” companies anymore. So why are they still in business? Because at the surface it seems really complicated to implement phone APIs and counter intuitive to say you can build the same voice services these companies are charging a 900% markup for in one afternoon and a few bucks.

That’s why I moved to consulting and wrote Building Phone Applications. I know that there’s a better, more affordable, and honestly cooler way to solve these kinds of problems. There is absolutely no reason why you shouldn’t be doing this for your company. In the book I will show you from the ground up how to leverage the latest VoIP technology, services and tools to create your own phone platform that does what you want, is infinitely customizable, and has virtually no cost whatsoever check it out and let me know what you think.

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