IP cloaking is the process of a web server delivering a specific web page based on the visitors IP address. Below are just a few examples of how IP cloaking could be implemented.
A business may notice a competitors IP address often visiting their site to grab how much they're charging for a product to undercut their price. IP cloaking could be enabled for that competitors IP address range causing the web server to deliver false price information each time their competitor visits their site.
Alternatively referred to as search engine cloaking, this form of IP cloaking is a black hat SEO technique to increase websites ranking. When an IP address associated with a search engine bot (e.g. Googlebot) visits the site, the server delivers a website with more keywords. However, when the visitor is not from Google, another search engine, or has a user agent string containing a browser the server delivers a completely different version. Keep in mind this type of technique is in violation of Google's webmaster guidelines and when detected can cause your site to be de-listed from search results. This technique is not the same as geo-targeting, which Google does allow as long as it is not being treated differently from a visitor.
IP cloaking can also be used to help distribute malware on a website. For example, a site could show a clean version of a site for a list of IP addresses associated with search engines and other online scan services websites. However, for all other visitors distribute versions of the website that infects the visitors computer with malware.