Skimming

Skimming Tax Evasion Revenue Management Marketing Strategy Price Skimming Competitive Pricing Product Lifecycle
Skimming can refer to either an illegal practice of failing to account for some sales or a marketing strategy involving high initial pricing for new products.
On this page

Definition

Skimming has two primary definitions based on context:

  1. Illegal Practice: In the context of accounting and taxation, skimming refers to the illegal practice of not reporting all received sales or revenue. This usually involves intentionally omitting some income in order to evade taxes, understate profits, or cheat business partners.

  2. Marketing Strategy: In marketing, skimming (price skimming or market skimming) is a pricing strategy where a company sets a high initial price for a new product. This price is often reduced over time as the product moves through its lifecycle and faces increased competition or reduced demand.

Examples

Illegal Practice

  • Restaurant Business: A restaurant owner might only report a portion of daily cash sales to reduce taxable income, pocketing the unreported amount.
  • Retail Store: A retail store could underreport cash transactions to minimize both tax liabilities and payments to business partners.

Marketing Strategy

  • Consumer Electronics: A company releases a new smartphone priced at $999. After a few months, as competitors launch similar products and demand begins to slow, the company reduces the price to $799.
  • High-tech Gadgets: A new virtual reality headset is introduced at a high price to target early adopters. Over time, the price is gradually lowered to attract a broader customer base as production costs decrease and competition intensifies.

Frequently Asked Questions (FAQs)

What are the consequences of skimming (illegal practice)?

Engaging in skimming can lead to serious legal consequences, including fines, penalties, and imprisonment. It can also damage a company’s reputation and result in loss of business.

How does price skimming benefit a company?

Price skimming allows a company to maximize revenues initially from early adopters willing to pay a high price. This helps cover development costs quickly and creates a perception of high value. Subsequent price reductions can help attract more price-sensitive customers.

Can price skimming be counterproductive?

Yes. If a high initial price dissuades too many customers, the strategy may backfire. Additionally, early adopters may feel alienated when prices drop significantly soon after launch.

  • Tax Evasion: The illegal act of not paying taxes owed by underreporting income, inflating deductions or engaging in other fraudulent activities.
  • Price Penetration: A pricing strategy where a product is introduced at a low price to quickly attract customers and capture market share.
  • Revenue Recognition: Accounting principle dictating when revenue is considered earned and reported in financial statements.

Online References

  1. IRS on Tax Evasion
  2. Marketing Strategies by AMA
  3. Skimming Pricing Strategy - Investopedia

Suggested Books for Further Studies

  1. “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports” by Howard Schilit
  2. “Marketing Management” by Philip Kotler
  3. “Pricing Strategies: A Marketing Approach” by Robert M. Schindler

Fundamentals of Skimming: Accounting, Taxation, and Marketing Basics Quiz

### What does skimming mean in the context of accounting? - [ ] Legally maximizing profits - [ ] Accurate revenue reporting - [x] Illegal practice of underreporting sales - [ ] Performing legal tax optimizations > **Explanation:** In accounting, skimming refers to the illegal practice of underreporting sales to evade taxes or cheat partners. ### What is an example of skimming (illegal practice)? - [ ] Reporting all sales accurately - [x] Not reporting all cash transactions - [ ] Using all profits for business improvements - [ ] Investing in competitor's stocks > **Explanation:** Not reporting all cash transactions is an example of skimming to hide actual revenue. ### What is price skimming in marketing? - [x] Charging a high initial price for a new product - [ ] Starting at a low price to quickly gain market share - [ ] Offering discounts to old products - [ ] Matching competitors' low prices > **Explanation:** Price skimming involves setting a high price initially for a new product before gradually lowering it. ### What sector often uses price skimming? - [ ] Agriculture - [ ] Textiles - [ ] Education - [x] Technology and Electronics > **Explanation:** Price skimming is frequently used in the technology and electronics sectors where new products enter the market at a premium price. ### What primary purpose does price skimming serve? - [x] Recovering development costs quickly - [ ] Keeping prices low indefinitely - [ ] Undercutting the competition - [ ] Attracting the most price-sensitive customers first > **Explanation:** Price skimming helps in quickly recovering the development costs by first targeting customers willing to pay a higher price. ### Who might implement the skimming (illegal practice)? - [x] Business owners with primarily cash transactions - [ ] Government officials - [ ] Startups without revenue - [ ] Online-only stores > **Explanation:** Business owners in cash-heavy operations are more susceptible to implementing skimming to evade taxes. ### What is the potential drawback of price skimming? - [ ] Attracting too many customers initially - [x] Alienating early customers with subsequent price drops - [ ] Reducing development costs - [ ] Charging all customers uniformly > **Explanation:** Early customers might feel alienated or undervalued if prices drop significantly soon after their purchase. ### Which term is related to skimming but involves different pricing strategy? - [ ] Tax deduction - [x] Price penetration - [ ] Cash substitution - [ ] Revenue recognition > **Explanation:** Price penetration involves starting with a low price to quickly gain market share, which contrasts with the high initial price strategy of price skimming. ### Why might a company reduce prices after implementing price skimming? - [x] To attract more price-sensitive customers - [ ] Because early adopters have criticized the product - [ ] Due to increased government regulation - [ ] Unrelated to market demand > **Explanation:** Prices are reduced to attract more price-sensitive customers as the product goes through its lifecycle and faces competition. ### Skimming as a marketing term is most appropriate for which phase of a product? - [ ] Closing - [x] Introduction - [ ] Maturity - [ ] Decline > **Explanation:** Skimming is usually applied during the introduction phase where the product is new and can command a higher price from early adopters.

Thank you for exploring the multifaceted concept of skimming through these detailed explanations and interactive quiz questions. Keep delving into the nuances of accounting, taxation, and marketing for a comprehensive understanding!

Wednesday, August 7, 2024
Skype
Skill-Intensive Occupation
BCG Matrix January 1, 1
Bundling January 1, 1
Loss Leader January 1, 1
Variable Pricing January 1, 1

Accounting Terms Lexicon

Discover comprehensive accounting definitions and practical insights. Empowering students and professionals with clear and concise explanations for a better understanding of financial terms.