Christmas comes but once a year and retailers hope it brings good cheer. From Black Friday and Cyber Monday, through the busy festive period and now into the January sales, retailers continue to feverishly battle for the pounds in our pockets.

Andrea Felsted wrote in the Financial Times recently that retail has entered a third phase of digital evolution in which online retailers, traditional store groups and – increasingly – social media networks seek to develop the most compelling relationship with the customer.

This challenge is compounded by the very different demands of Millennials, the world’s first truly digital generation of shoppers, who started reaching young adulthood around the year 2000. Millennials, who shop with an eye toward discounts and customisation, spend more money online than any other age group and will account for nearly $1.4 trillion in spending power by 2020. Smartphones are the most-used shopping device for Millennials due to convenience, brand promotion on social media and easy to use apps.

Millennials still visit bricks and mortar stores, but many retailers – particularly in the fashion industry – now find that their expensive stores are being used increasingly as offline showrooms for virtual competitors. Smart shoppers will browse a store, take advice from assistants and even try items on before searching for the best price online. Many purchases are completed in store, but more and more via smartphones with lower price virtual retailers, rather than at the till.

While online retail has boomed, for every Amazon or ASOS there are many thousands of online stores struggling to eke out a profitable existence due to the challenges of competing in a price driven global marketplace.

Shopping malls and high street retailers have taken the brunt of these new competitors, but online, offline and blended retailers alike are all seeking to develop closer emotional connections with customer as well as compelling points of differentiation to sustain margins and avoid a price driven spiral to financial oblivion.

Online retailers must now work harder to offer greater convenience and find different ways to stand out. Argos’s decision to offer same day delivery in the UK, for instance, is a positive step for customers and a compelling differentiator for its online business made possible by its existing physical network.

Fashion retailers in particular are turning to new technologies to enhance both their in-store and online presences. In South Korea, for instance, where consumers have taken to virtual reality and augmented reality with gusto, some stores have started experimenting with magic mirrors that allow shoppers to try clothes on virtually. Shoppers can browse through a range of different items very quickly, see how they look from a variety of angles and even share images with friends to validate their purchases on social media.

It is technically possible to mirror this approach online and number of organisations are working on how to make it work well. Online fashion retailers will get a huge boost when customers can see precisely how they would look in an item they are browsing online. An accurate customer avatar would ensure that they find exactly the right size every time they shop with a trusted retailer online.

Some fashion houses are already using virtual reality to showcase their brands.Dior, for instance, provides new opportunities for connection and insight into its brand through 360 degree catwalk shows and immersive behind the scenes access to its models and makeup artists.

ASOS is working with a Croatian startup, Trillenium, to develop a virtual store environment for showcase its products. Shoppers with virtual reality headsets will be able to browse an online representation of a physical store and interact for closely with a range of 3D products.

The biggest challenge to virtual showrooms and a more immersive online retail experience is the size of retailers’ inventories. It is difficult to capture and serve large collections realistically and cost effectively in 360 degrees. Retailers must tackle this challenge in bite sized chunks and think hard about which items to showcase.

The battle for the pounds in our pockets will continue to intensify over the coming years, particularly from retailers keen to attract Millennials. All kinds of retailers, however, face the challenge of remaining relevant and profitable in an increasingly digital world, and continue to look to new technology to enhance their customer experience and the value they offer.