With Big Box stores in clearance mode, smaller retailers can no longer compete for holiday shoppers on price alone.

The holiday selling season is behind us, and as small and independent retailers work through their customer returns and gift cards and clearance sales, it's not too early to be thinking ahead to next year. For many, this was an unsettling season, as customers waited longer and longer to shop, and established selling patterns seemed to shift.

National retail sales between Thanksgiving and Christmas this year were projected to be up just 3.6% over the prior year, compared to 6.6 percent in 2006 and 8.7 percent in 2005. Many experts have attributed the softness to a weakening economy. But there was something different about this year, far more different than just weaker sales.

A week after Black Friday, I came upon the Kohl's circular for the week. They were promoting their 50 percent off sale, and as I paged through it, I was struck by how category after category was included in the sale. Not just items, but whole categories. The week after Thanksgiving, Kohl's was transitioning into full clearance mode.

What's different this year is that in the mad scramble to make sales numbers and protect market share, the entire retail industry seemed to lose its mind. The traditional post-Thanksgiving sales broke just after Halloween, and entire stores were on clearance by early December. All in an effort to be able to report comp-store increases. As if customers weren't smart enough to understand that all of that early discounting would only lead to even deeper discounting if they waited. When the industry starts reporting quarterly results in the next month or so, there may be comp-store sales gains reported, but earnings are very likely to be quit ugly.

What we saw this holiday selling season is a dramatic jump in the pace of commoditization of general merchandise, across almost every category, from electronics to apparel and beyond. What we are experiencing is the permanent erosion of margin, as the Internet empowers consumers with an expanded ability to compare prices on identifiable, branded items, as EBay enables buyers to find an ever expanding array of niche products, and as Big Box retailers race to the bottom to protect market share.

This has significant implications for smaller and independent retailers. Competing on price at any level is simply no longer sustainable for these retailers. They absolutely must be able to protect price integrity. Those that have succumbed to an ever-increasing promotional posture find themselves on a slippery slope they are desperate to scramble off of. Price integrity is critical to maintaining margins, and maintaining margins is critical to basic financial survival.

There have always been, and always will be, customers who are less price sensitive, who base their shopping and purchasing decisions on other factors. These are the customers that the most successful small and independent retailers have long built their strategies around. Like every consumer, however, these customers are also becoming increasingly savvy and demanding.

What can small and independent retailers do? Here are several thoughts:

Small and independent retailers have long understood that they needed to carve out carefully defined niches for themselves, niches where they could establish themselves as the destination retailer of choice with their narrowly target customer base. What's becoming evermore clear is that a niche cannot merely be defined by unique products or assortments, but must be defined by a lifestyle, an attitude, a passion. The niche must now be defined, and the retailer must build its name to represent, a clearly identified emotional appeal to its target customer.

The Internet is a great provider of product information, but it can never replicate the value of a customer's interaction with a highly knowledgeable salesperson. Enthusiastic, state-of-the-art product knowledge is absolutely indispensable in this information age. Customers go to Big Box retailers to buy things, but they turn to small and independent retailers to solve problems. The ability to help customers solve these problems is a critical point of differentiation for small and independent retailers.

Consumers will never be fully content to sit in their homes in front of their computers and click away, no matter how convenient it might be. They crave compelling presentations and captivating experiences. Stores that amuse, educate or entertain, stores that invite customers to explore and discover, stores that stimulate the senses and trigger a visceral response are the stores that customers will respond to. Those retailers who constantly strive to reinvent themselves and present a new, intriguing face to their customers will be rewarded with a more loyal customer base and priceless viral marketing

The Internet, nevertheless, has dramatically increased the importance of convenience to customers. As much as customers still want to shop in stores, they are increasingly impatient with stores that don't make it easy. They are increasingly unwilling to put up with inaccessible parking, cluttered, confusing stores, hard to find destination items, in-your-face salespeople, invisible salespeople when they do want help or have a question, long lines at checkout, and restrictive, retailer-centric returns policies, to name just a few highlights. One of the most notable recent marketing campaigns has come from Staples, with their Easy Button. Customers increasingly want it to be easy.

The retail landscape is changing rapidly, driven by profitability pressures on the major corporate retailers, on the one hand, and the decentralizing effects of the internet on the other. The pace of these changes can be very unsettling to small and independent retailers, but opportunities to differentiate, prosper and thrive are still there to be seized.