Cream skimming
Encyclopedia
Cream skimming is a pejorative
term used to refer to the perceived business practice of a company providing a product or a service to only the high-value or low-cost customers of that product or service.
Whether or not the perceived negative effects of cream skimming actually do occur - or only occur in limited circumstances - is a matter of debate. This article is not intended to make any argument as to whether the practice can or does happen in any circumstance, but simply to identify the term in order that the reader may understand the general context in which it is used.
The term derives from the practice of extracting cream
from fresh milk at a dairy
, in which a device called a "separator" draws off the cream (which is lighter, and floats) from fresh or raw milk. The cream has now been "skimmed" or captured separately from the fresh milk.
The idea behind the concept of cream skimming in business is that the "cream" - high value or low-cost customers, who are more profitable to serve - would be captured by some suppliers (typically by charging less than the previous higher prices, but still making a profit), leaving the more expensive or harder to service customers without the desired product or service at all or "dumping" them on some default provider, who is left with less of the higher value customers whom, in some cases, would have provided extra revenue to subsidize or reduce the cost to service the higher-cost customers, and the loss of the higher value customers might actually require the default provider to have to raise prices to cover the lost revenue, thus making things worse.
The term has also been used in relation to the concept of school vouchers in which it is claimed that the vouchers could be used by parents of "better" students to move them out of lower performing or substandard public schools and into less-crowded private ones, leaving the more disruptive and harder to teach ones behind in the public schools, making the situation worse.
For example, it was believed that MCI
and Sprint
long distance telephone
companies would end up taking away very high value business and some residential accounts from AT&T
, leaving AT&T primarily with higher-cost to service accounts or ones producing less revenue (such as customers in less-densely populated or rural areas), meaning all customers of AT&T would end up paying more. This could conceivably lead to a vicious circle
as more customers leave the high-price carrier for the lower priced carrier, thus forcing still more price increases to cover the upward spiraling costs of providing service to a shrinking revenue base. This scenario did not occur, as various technological changes (spurred in part by the availability of competition) eventually lowered the net cost for most long-distance telephone calls.
The United States Postal Service
has a monopoly on the delivery of "non-urgent" first-class mail, where delivery is not time-sensitive. It also has the exclusive right to use customer-owned mail boxes for placing the customer's mail for delivery. This means that, even though mail boxes, such as those in the door of a house, or on the curb, or in the front lobby of the customer's building, are owned by the customer, and not owned by the Postal Service, by law only the Postal Service may use them to deliver mail. This law is in effect because it is believed that were the Postal Service to not have this monopoly, other competing mail carriers would take over the most lucrative parts of the business (e.g. local delivery of bills in dense urban areas), leaving the Postal Service with more expensive urban deliveries and rural service.
Pejorative
Pejoratives , including name slurs, are words or grammatical forms that connote negativity and express contempt or distaste. A term can be regarded as pejorative in some social groups but not in others, e.g., hacker is a term used for computer criminals as well as quick and clever computer experts...
term used to refer to the perceived business practice of a company providing a product or a service to only the high-value or low-cost customers of that product or service.
Whether or not the perceived negative effects of cream skimming actually do occur - or only occur in limited circumstances - is a matter of debate. This article is not intended to make any argument as to whether the practice can or does happen in any circumstance, but simply to identify the term in order that the reader may understand the general context in which it is used.
The term derives from the practice of extracting cream
Cream
Cream is a dairy product that is composed of the higher-butterfat layer skimmed from the top of milk before homogenization. In un-homogenized milk, over time, the lighter fat rises to the top. In the industrial production of cream this process is accelerated by using centrifuges called "separators"...
from fresh milk at a dairy
Dairy
A dairy is a business enterprise established for the harvesting of animal milk—mostly from cows or goats, but also from buffalo, sheep, horses or camels —for human consumption. A dairy is typically located on a dedicated dairy farm or section of a multi-purpose farm that is concerned...
, in which a device called a "separator" draws off the cream (which is lighter, and floats) from fresh or raw milk. The cream has now been "skimmed" or captured separately from the fresh milk.
The idea behind the concept of cream skimming in business is that the "cream" - high value or low-cost customers, who are more profitable to serve - would be captured by some suppliers (typically by charging less than the previous higher prices, but still making a profit), leaving the more expensive or harder to service customers without the desired product or service at all or "dumping" them on some default provider, who is left with less of the higher value customers whom, in some cases, would have provided extra revenue to subsidize or reduce the cost to service the higher-cost customers, and the loss of the higher value customers might actually require the default provider to have to raise prices to cover the lost revenue, thus making things worse.
The term has also been used in relation to the concept of school vouchers in which it is claimed that the vouchers could be used by parents of "better" students to move them out of lower performing or substandard public schools and into less-crowded private ones, leaving the more disruptive and harder to teach ones behind in the public schools, making the situation worse.
For example, it was believed that MCI
MCI Communications
MCI Communications Corp. was an American telecommunications company that was instrumental in legal and regulatory changes that led to the breakup of the AT&T monopoly of American telephony and ushered in the competitive long-distance telephone industry. It was headquartered in Washington,...
and Sprint
Sprint Nextel
Sprint Nextel Corporation is an American telecommunications company based in Overland Park, Kansas. The company owns and operates Sprint, the third largest wireless telecommunications network in the United States, with 53.4 million customers, behind Verizon Wireless and AT&T Mobility...
long distance telephone
Interexchange carrier
An Interexchange Carrier is a U.S. legal and regulatory term for a telecommunications company, commonly called a long-distance telephone company, such as MCI , Sprint and the former AT&T in the United States...
companies would end up taking away very high value business and some residential accounts from AT&T
AT&T
AT&T Inc. is an American multinational telecommunications corporation headquartered in Whitacre Tower, Dallas, Texas, United States. It is the largest provider of mobile telephony and fixed telephony in the United States, and is also a provider of broadband and subscription television services...
, leaving AT&T primarily with higher-cost to service accounts or ones producing less revenue (such as customers in less-densely populated or rural areas), meaning all customers of AT&T would end up paying more. This could conceivably lead to a vicious circle
Vicious Circle
Vicious Circle is an album released in 1994 by L.A. Guns. Most of the songs have Phil Lewis on lead vocals, but the track "Nothing Better to Do" features Kelly Nickels on lead vocals, and "Tarantula" is instrumental. MC Bones drums on several songs. Lewis and Bones also played together in the band...
as more customers leave the high-price carrier for the lower priced carrier, thus forcing still more price increases to cover the upward spiraling costs of providing service to a shrinking revenue base. This scenario did not occur, as various technological changes (spurred in part by the availability of competition) eventually lowered the net cost for most long-distance telephone calls.
The United States Postal Service
United States Postal Service
The United States Postal Service is an independent agency of the United States government responsible for providing postal service in the United States...
has a monopoly on the delivery of "non-urgent" first-class mail, where delivery is not time-sensitive. It also has the exclusive right to use customer-owned mail boxes for placing the customer's mail for delivery. This means that, even though mail boxes, such as those in the door of a house, or on the curb, or in the front lobby of the customer's building, are owned by the customer, and not owned by the Postal Service, by law only the Postal Service may use them to deliver mail. This law is in effect because it is believed that were the Postal Service to not have this monopoly, other competing mail carriers would take over the most lucrative parts of the business (e.g. local delivery of bills in dense urban areas), leaving the Postal Service with more expensive urban deliveries and rural service.