04/19/2012 01:12 pm ET Updated Jun 19, 2012

Before It's Too Late: Rethinking the Daily Deals Business Model

Kirk Jamison is a savvy guy. He and his wife own KT's BBQ, a chain of four restaurants in the Denver area that specializes in fantastic BBQ for a lunchtime crowd. The daily deal sites rang his phone non-stop, yet the concept never made sense. "Word-of-mouth drives my business and we run on tight margins. I couldn't provide a 50 percent discount and then give half of what's left to a deal provider. I need to be able to control the type of deal that goes out, how many are sold and retain the ability to make a profit," he told me recently.

New customers through word-of-mouth, the ability to control the type and amount of deals offered, and making a profit. Those sound like pretty reasonable requests from a local business owner trying to make a living. Sadly, he is right that the daily deal industry often falls short on not one, not two, but all of these goals. In the meteoric rise of the deals industry, local merchants have found that they receive once-and-done boatloads of deal-seekers, must customize their offer to meet the needs of the deal provider and are unable to create offers that are profitable because of the strict constraints imposed by deal vendors. It's a world set up for the deal providers' success, not the local merchants' and it must change.

Incentivize word-of-mouth: Small businesses want new customers and word-of-mouth has always been the best source of new customers. That idea has remained true for decades. When relationships began moving online, word-of-mouth moved with it, whether on Facebook, Twitter or through email. Local businesses, however, have not been given the tools to incentivize and track word-of-mouth, the simple act of getting your customers to tell their friends about you. Word-of-mouth is powerful -- it results in new customers for your business, customers that look a lot like your existing customers, with similar tastes and living in the same community. They aren't just deal-seekers; they are more likely to become loyal, repeat customers. That's a valuable thing, something worth encouraging among customers.

Control over offers: Local merchants understand their business better than anyone else. They know whether a 50 percent discount will attract new customers or if 25 percent off will suffice. They know the types of customers that turn into repeat customers. They know how many new customers they can handle without getting overloaded. Finally, they know what information they need to engage with customers online. Daily deal companies have often dictated the terms of deals to local merchants, pushing them to accept it and leaving the ability to turn new customers into loyal customers up to the merchant -- without even giving them the contact information of those new customers to make that happen. Treating small businesses like this is not sustainable and is simply not right. Fortunately, it does not have to be this way.

Profit: The days of being forced to give a 50 percent discount to get people in the door and giving half of what's left to a deal company are over. Period. For the vast majority of local businesses, this model is simply not affordable. Most merchants understand the concept of investing marketing dollars to get new customers, yet the deals being run are resulting in new customers that do not turn into repeat customers. And without their new customers' contact information, they have very little chance of engaging with them beyond the initial deal purchase. This is not setting merchants up for success. If I buy from you, I become your customer and you should have the tools at your disposal to bring me back for more.

It's not too late. There is a sustainable business model that serves the needs of both local merchants and consumers. If we give merchants the tools to incentivize word-of-mouth, give them control over the deals they run and ensure the economics will give them a profit, this industry can have an inspiring and bright future. Those are terms that Kirk Jamison would love, terms that can help KT's BBQ become even more popular for its delicious BBQ in the Denver community.

Dave Gilbertson is VP & GM of SaveLocal at Constant Contact.