The daily-deal business model is transforming local advertising and how businesses operate. But while slashed prices may bring more business, some argue that the widespread influx of daily-deal models do more harm than good.

The first ones to the market are expanding, and clones are popping up throughout the nation. Groupon reports adding 150 employees a month at its Chicago-based headquarters, Ideeli is overloading the grid with all of its electronic equipment in its New York office, and Living Social opened its third office in Washington and ran out of room.

What’s Up Santa Barbara Daily Deals, Santa Barbara Axxess and WinWin Living are just a few that have swarmed local businesses.

Steve Smith, director of marketing for WinWin Living, says the wave of deal-a-day sites has become an annoyance for merchants. WinWin allows users to donate 10 percent of the site’s deal proceeds to charities.

“One thing we’re starting to find with more competing sites is a lot of annoyance on the merchant side,” he said. “There is a lot of people calling to compete for merchants who want to run on your site.”

Bob Wilcher owns and trains at Killer B Fitness. He partnered with Groupon about three weeks ago to offer discounted monthly packages. The Groupon site says its subscribers are “one of the largest, most desirable audiences for any business — and one of the hardest to reach with traditional advertising.”

“All in all, it’s worth trying because it doesn’t cost anything and it’s free advertising,” said Wilcher, adding that 40 people signed up and about 12 of them have redeemed the ticket.

Draber Boehm, who recently opened an acupuncture business at 209 Anacapa St. and is new to Santa Barbara, agreed with Wilcher.

“It’s a good way to get our name out, and I felt it was beneficial to let 40,000 people know there was a new acupuncturist in town,” said Boehm, adding that he never felt stifled or controlled by Groupon. “It’s a good way to build business for new businesses. If we monetize our time spent doing outreach, this was brilliant because we saw patients the day it ran.”

New businesses that need an initial influx of customers may benefit from the exposure Groupon provides, but those with high margins will suffer, according to Bob Phibbs, author of Groupon: You Can’t Afford It — Why Deep Discounts Are Bad For Business and a former regional vice president for Howard & Phil’s Western Wear, overseeing locations in Santa Barbara.

“You can jam the restaurant, but if you’re not looking at the bottom line it can definitely come back and hurt you,” Phibbs said. “The way you market all days of the year is through service and quality of people on the floor. You should market to the people who are already raving fans rather than risk having both (newcomers and regulars) getting upset at you.”

Draber owns a membership-only gym and knows a competitor who ran a Groupon for the private gym and was inundated with 100 new members in two days.

“That many people that fast really turned off their loyal members,” Draber said. “Our customers told us if we would run a Groupon ad, they would be pissed.”

Many celebrating Japanese New Year weren’t thrilled when a Groupon deal for a traditional New Year’s meal attracted overwhelming demand that resulted in late deliveries and low-quality food. Groupon apologized and refunded unhappy customers.

Phibbs said Groupon and Living Social push businesses not to use a cap on how many customers can buy the deal in order to generate return customers for itself.

“It has a major affect on profit-margin because Groupon takes half of the sale,” he said. “It could bankrupt businesses; it’s not sustainable.”

But the model seems to be working for Groupon and Living Social.

Groupon has expanded from 2 million to 85 million subscribers in the past 18 months, and Living Social went from 120,000 subscribers to 28 million. Groupon, headed by CEO Andrew Mason, is expected to generate $3 billion to $4 billion in revenue this year, up from $760 million last year, according to Local Offer Network, which collects and distributes deals from hundreds of sites. Living Social is also one of the 10 fastest-growing sites with 7 million unique visitors in March, a 27 percent jump from February, according to ComScore.

But Phibbs said businesses that use these sites buy into its brand and not the vendors.

“People have to realize how commoditized their product is becoming when signing up for one of these,” he said. “They are the one whose brand you are building, and the only way you can keep customers returning is with higher discounts.” 

Wilcher said daily-deal sites don’t often attract return customers.

“If you are looking to retain clients, I think your deal has to be very comparable to the Groupon, otherwise people will go elsewhere,” he said.

Melissa Tierney is the director of business development and operations for SBClick, a site and app that provide a communication tool for merchants and their customers.

“The Groupon-type business is good to get people in the door, but it targets coupon cutters,” she said. “Many businesses tend to find that the return on the investment isn’t as great.”

Smith said sites such as Groupon don’t cater to merchants, adding that they see a “Walmart-type corporation based in Chicago” that doesn’t care about the merchants.

“They aren’t local, they aren’t accessible — they sign a contract and disappear — and they aren’t willing to work with merchants,” Smith said. “The caps are high so a merchant can sell 3,000 deals at a bagel shop and can go out of business. WinWin wants to make sure they don’t oversell because it could be devastating.”

WinWin Living public relations director Carolyn Firestone described the relationship as a “one-night-stand approach.”

“They say they love your business and give you all these phone calls, and then you literally can’t get them on the phone to talk about campaign, and if (a merchant) wants to run another deal they won’t do it right away,” Firestone said.

But Tierney said Groupon deserves the credit for an original business model, but the clones aren’t done yet.

“We’ve got a long way to go with the Groupon fad,” she said.

— Noozhawk staff writer Alex Kacik can be reached at akacik@noozhawk.com. Follow Noozhawk on Twitter: @noozhawk, @NoozhawkNews and @NoozhawkBiz. Become a fan of Noozhawk on Facebook.