Holiday retail projections are upbeat, but what's a small business to do with competition from deep-discounting big-box stores and consumers who are focused on seizing deals? 

The National Retail Federation expects retail sales to increase 2.8 percent this year. Both ShopperTrak and IBIS World forecast holiday sales to increase over last year by roughly 3 percent, and a Purdue University survey predicts holiday shopping to rise 4 percent this year.

While consumer spending is expected to grow this year, the predictions for the 2011 holiday season fall shy of last year's growth. And the stakes are always higher for small businesses, which don't have as much flexibility as mass retailers to discount. On top of that, holiday sales typically comprise about 20 to 30 percent of a small business's annual sales, says NRF spokesperson Kathy Grannis.

While the entrepreneurs populating Main Streets certainly hope for a sales boost in the November and December months (including the power-shopping days of Black Friday and Cyber Monday), they're cautious. Sixty-two percent of those surveyed by Manta say sales figures so far this year are down or flat compared to last year; more than half are similarly or less optimistic about holiday sales than last year.

Indeed small-businesses owners interviewed by Inc.com are setting out to distinguish themselves on factors other than price like customer service and experiences, high-quality products, and creative outreach.

"How am I going to compete with the Macy's or Bloomingdales on prices? It's not possible. So we compete on quality and value," says Oren Bloostein, owner of New York City-based specialty coffee chain Oren's Daily Roast. I'm actually seeing that customers want more for their money when it comes to gifts, so I'm hopeful."

Bloostein, who sells specialty coffee-based gift items during the holidays, says that the unpredictable-but-mostly-sluggish economy this year has put his business in a precarious position going into the holiday season.

"I've had to raise prices this year because of a volatile coffee market. The terrible, rainy weather made for a really bad October, and a college closing near one of my shops meant an entire customer base was lost," he says. "I have to be really careful about inventory this year. I don't want to be left with a bunch of overstock come January."

Although consumer holiday spending last year exceeded expectations, this season's extimates barely are an increase when inflation is considered.
 
Darryl Peck, owner of Georgia-based Apple retail chain PeachMac, says he's also expecting a modest boost from the holiday rush—but nothing like last year.

"Holiday sales don't even make up 20 percent of our annual sales," he says. "We are also really dependent on product cycles. Like last year, it was the iPad, so that sold like hot cakes. Macs always sell well, but this season might be different."

With electronics sales making up a large part of the holiday retail, Peck says he competes with the Apple "mothership" stores by making personalized connecting with his customers.

"We don't do discounts. So we have special offers that we advertise in newspapers, direct mail, e-mail, and online," he says, adding that Black Friday is a really big day for foot traffic in his stores.

Other small shops simply can't keep up with bigger stores. Bloostein says that his small storefronts "can't compete with the Black Friday deals of the bigger stores." And Marco Murillo, owner of a Portland-based eco-friendly electronic accessories maker The Good Flock, also says his holiday sales simply can't be based on massive discounts the way big-box retailers can.

"Our customers are expecting high quality, and that simply costs more, but it's part of our brand," he says. "Last year was our first holiday and we did okay, but learned a lot."

Selling gift-ready items like laptop covers and phone cases, Murillo says he's found one way this year to get a slice of big chains' business: good public relations.

"We got into the magazine and blog gift guides early this year, and it really paid off," he says, adding he's seen a jump in orders already. In the last year, Murillo's new business has cultivated a following of eco-conscious consumers that are loyal to the brand—and he plans to use that to his advantage.

Small businesses are also capitalizing on, well, what they've always been good at: outstanding personalized customer service.

"I think it's an advantage that [small businesses] have over the other guys: direct relationships with customers. Believe it or not, people appreciate that these days," Murillo says.