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Hosted PBX Providers for Sale

Hosted PBX is one of technology’s great businesses. Let me count the ways.

First, every company needs a PBX, and CIOs increasingly favor one that's in the cloud. Second, hosted PBX is a young industry. After just two decades on the scene, 18% of all new business phone systems are hosted. Room for industry growth is abundant. Third, hosted PBXs offer good margins all the way down the distribution line. A model hosted PBX provider, and there are many, generates 50-75% gross margin. You only need to examine a hosted PBX company like 8x8 to see the promise. Fourth, hosted providers have a decent sales formula that incorporates gobs of indirect marketing flowing directly into a contact center to close sales. Here’s how it works: Prospective customers see the ads, point their browsers, and click. Vendor contact centers take it from there. The overall process is "demand selling." I’ll come back to this because it’s a dead-end for enterprise customer aspirants.

Two Operating Business Models

At one time I sold large PBXs and networks for a living, before moving up to manage the company sales force that did much of the same thing. The business had a separate operation for small customers. The sales formulas for large and small customers differed, as did certain business operations. While maintaining two models for our multibillion-dollar business was expensive, it worked. And did I say this was a multibillion-dollar business -- with deep, deep pockets?

Demand Selling

Demand selling is a good business model for selling to small customers -- up to 30 employees and 20 or so phones. It’s how the hosted PBX industry functions. With demand selling, sales prospects take the lead. They’re driving.

Seventy percent of all hosted business comes over the transom. Sales are small and close quickly -- typically in two weeks. All told, sales average fewer than 15 licenses. As I noted above, these are all demand sales. This is the very definition of demand selling.

Hosted PBX vendor sales and marketing expenses are over the moon. Frequently, selling expenses consume one-half of revenues. Closing large mid-market and enterprise deals requires time, and vendors show little appetite for long sales cycles -- and that’s assuming a CIO’s willingness to buy. Note: CIOs generally surface in businesses with more than 300 employees.

Enterprise hosted PBX sales are different from those made to small businesses. One distinction is the selling cost. However, it’s a red herring. I’ll get to that. 

See the chart below for average selling time for small, mid-market and enterprise sales.

Eastern Management Group infographic of hosted PBX sales cycle by company size

Source: Eastern Management Group

A three-month sales cycle (see chart) is an avoidable luxury for any hosted PBX vendor when already half of the annual revenue is eaten away on hundreds or thousands of little two-week sales encounters. But what distinguishes the 10-20 seat hosted sale from the all too common 100-seat premises PBX has less to do with the cloud sales cycle and more with CIO’s expectation of the hosted provider.

Need for Scale

Most hosted PBX organizations are built to support SMBs and not many enterprise customers. The case for tier-one and tier-two carriers with Centrex backgrounds is the outlier. Here’s what’s essential to would-be CIO customers and not comprehensively addressed by cloud providers: how quickly services can scale, global coverage, networks, network engineering, R&D, sales, marketing, OSS, BSS, hiring, managing, training, business practices, and more. All this may be SMB-ready but may fall short of an enterprise IT manager’s expectations. The fix requires operations improvement by hosted PBX vendors, as I’ve seen in the Eastern Management Group’s research and consulting practice.

PBX vendors like Avaya, Cisco, Alcatel-Lucent Enterprise, Unify, or NEC can scale. They have the CIO’s confidence. But the premises PBX providers, by and large, have proven deficient mastering the hosted PBX business. Limitations such as this are a problem whenever CIOs clamor for cloud PBX solutions. In the meantime, the premises PBX business is slipping away from equipment companies.

So, what we’re left with is a hosted PBX industry that isn’t enterprise-ready but must be -- and a premises PBX industry that is ready for everything but the ability to sell hosted PBX to mid-market and small customers.

The Jack Sprat Use Case

The path for hosted PBX and premises PBX companies could be straightforward. Each industry has ability lacked by the other. What does each get from an acquisition of the other?

Premises PBX Providers Give:

  • Scale
  • Recognition and acceptance by CIOs
  • Mid-market and enterprise customers
  • Large average sales, now probably on the order of 60-100 seats
  • Lower sales cost per seat
  • Increased net profit
  • Capital to grow and expand

Hosted Providers Give:

  • Running a UCaaS business
  • Cloud channel strategy
  • Solution demanded by CIOs
  • Mid-market and small customers
  • Cloud solution to mitigate the decline of premises PBXs
  • Ongoing operations

Necessary Acquisitions

Left alone, both the hosted vendor problem (mid-market and enterprise growth) and the premises PBX problem (sales to mid-market and smaller prospects) won’t be neatly solved. The change will be slow, mergers between hosted PBX companies will happen to reduce operating costs, acquisitions by private equity companies will occur. But the enterprise customer is forgotten.

On the other side of the ledger, the premises PBX vendor sells a hybrid solution to take up some of the slack from an eroding premises PBX business. But it misses the necessary hosted portfolio and skills.

This solution of PBX vendors buying hosted PBX vendors is workable and preferable to most other options.

Eastern Management Group’s new report “Worldwide Hosted PBX Market 2018-2024” influences the above analysis. For questions, please ask our researchers or contact John Malone directly at [email protected].