Online retailers collect vast amounts of data on customers, including what products they look at, their purchase history, and how long they browse before buying. For years, this has given e-commerce giants such as (NASDAQ:AMZN) an edge over physical retailers. However, thanks to location-based technology, brick-and-mortar stores are finding new ways to track in-store shoppers.

Big Brother goes shopping for data
(NYSE:JWN) and Target (NYSE:TGT) are some of the retailers today using Wi-Fi to track your shopping behavior inside their stores. By following the Wi-Fi signal emitted from a customer's smartphone, retailers can monitor that shopper's location inside a store, even if said shopper isn't connected to the store's wireless network.

In a bid to be more transparent about its monitoring efforts, Nordstrom posted signs inside stores earlier this year that notified customers they were being tracked. Nonetheless, the department store chain ended its monitoring program in May following complaints from customers, according to The New York Times. Other retailers, though, are proving more skilled at marketing Wi-Fi to customers.

Target, for example, now offers free Wi-Fi in all of its 1,797 U.S. locations. Signs at some of its stores' entrances encourage customers to take advantage of free in-store Wi-Fi or connect using Target's mobile app.In most cases, guests are then asked to agree to terms of service before being granted access to the store's network.

Target's legal agreement notifies users that the retailer will collect and store information such as the Web pages they visit and the type of device they're using. But don't expect any signage on how Target uses this information. For that you'll need to read the company's Wireless Service Privacy Notice.

How customer data makes retailers more competitive
Target can better influence how people shop in its stores by collecting and dissecting personal data about its customers. In a sense, Wi-Fi tracking is leveling the playing field between brick-and-mortar businesses and their online rivals.

Amazon has long used what it calls "item-to-item collaborative filtering" to recommend products to customers based on what they've purchased in the past. This approach has helped Amazon grow into an online powerhouse with a $141 billion market cap. Similarly, new in-store tracking services enable physical retailers to offer customized coupons and connect with customers in a way that drives sales.

Of note is that online tracking is much less invasive than tracking a person's smartphone. That's because an e-commerce site like Amazon uses cookies to monitor a Web browser, not an actual person. On the other hand, Wi-Fi tracking services such as those offered by New York-based Nomi use a smartphone's unique signature or MAC address to profile individual shoppers."It's literally bringing the Amazon experience into the store," according to Nomi president Corey Capasso.

For Target and other retailers like it, there are countless benefits to becoming more like Amazon. In fact, people who access a store's website or app while in the store are 33% more likely to buy an item that day, according to a recent study by Deloitte . Through smarter analysis of customer data, retailers are turning more in-store visitors into customers. Ultimately, this could weaken Amazon's edge over brick-and-mortars.

Fool contributor Tamara Rutter owns shares of and Target. The Motley Fool recommends The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.