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Without a doubt, mobile phone technology and its advances have changed life in dramatic ways—ways in which many people probably never thought possible just a few years back. Few would’ve guessed that shopping, other than the conventional catalog ordering method, could be done with a cell phone. Besides the basic calling capability, today’s mobile phones, specifically smartphone devices, come loaded with features and functions that make it easy for people to stay connected, get information quickly through the Web, and even tackle some day-to-day activities, including shopping, all with just a couple of clicks. With more functions being added regularly, it is no wonder that people are relying more heavily on their mobile phones these days. And retailers know it.

The advent of smartphone devices in recent years, particularly Apple’s (AAPL) iPhone in 2007, which became a hit almost instantly, appears to now be having an impact on the retail industry. In fact, these nifty little gadgets are helping to change, or at least, enhance, the way retailers do business and connect with customers, fusing the physical store and e-commerce experiences. Equipped with sophisticated operating systems, smartphones are capable of supporting a range of software applications, commonly referred to as “apps”, which are downloadable and are either free or paid for by the owner of the device. Retailers essentially use apps as a marketing tool to lure customers.

Apps come in various formats. Some, via the GPS capability of smartphones, can detect if a customer is in the vicinity of a store or in the shop itself, at which point they alert the customer to any special deals or promotions. There are also apps that provide money-saving offers and coupons, or use a point system to give shoppers incentives. Other programs allow customers to research products as they browse the aisles in stores, help them locate specific products, or enable them to do price comparisons for similar products sold by competitors. There are even apps that convert into loyalty programs of sorts.

More and more, mobile phone apps are being viewed as a lucrative opportunity to drum up sales and encourage repeat customer visits, while making the shopping experience for patrons more convenient and efficient, not to mention interactive and entertaining. Several retailers have been at the forefront of this digital marketing phenomenon, including, J.C. Penney (JCP). Indeed, the operator of moderately priced department stores is among the first retailers to employ the technique, making hefty investments to develop its own mobile phone apps. Big-box electronics retailer Best Buy (BBY) and mall-based department store chain Macy’s (M), along with teen apparel maker American Eagle Outfitters (AEO), are other pioneer companies riding the new wave of retailing through mobile phone apps. Similarly, discount retailers Wal-Mart (WMT) and Target (TGT), and entertainment giant Disney (DIS) are all planning to roll out the technology, likely by 2011 or 2012. As the trend takes off, others are likely to jump on the bandwagon.

But there are downsides. For one thing, and perhaps most important, there are privacy concerns. Smartphone technology essentially allows a retailer to keep track of customers’ locations or spending habits. What’s more, the programs aren’t immune to glitches, which can lead to a less-than-optimal shopping experience and ultimately result in a lost sale. Another potential drawback is that digital initiatives aren’t cheap, which means not all retailers will be able to afford or readily adopt the technology. On the other hand, a retailer can save on labor costs.

Still, as the kinks get worked out, mobile phone apps are likely part of the future of retailing—a reality that sooner or later most merchants will have to face.