I think it's a personal decision, especially at the lower - non-qualifying levels and even more so at the basic skills level. Skating is a marathon - not a sprint. When you get to the qualifying levels of novice thru senior, it does become much more strategical. With that said - is it your child's intent to win every competition? That's not really all that feasible and probably, some will disagree, not that good for the skater. If staying back in order to win at the very low levels is important to some, that's fine. Personally - we (my skater included) couldn't wait to get out of the basic skills series. My daughter, by the end of a season, is usually finishing in the top half of the skaters and that's fine with us. We make sure she's "competitive" at her levels but we really are looking at the big picture not the individual competitions.
In regards to the lower levels, when my daughter was much younger and starting at pre-pre, it was challenging however I told her that if what she wanted was a medal, she could compete snowplow sam and probably win (yes, I know it wasn't possible, but she was young and didn't know). When I would pose that question to her, she "got it". Yes, medals are shiny and pretty and it's fun to stand at the top of the podium. However, it's more fun for the skater, in my opinion, to work really hard on an element and finally get it and then compete with that element and get credit for it! It's the process or the journey, not some moment in time where a few kids put on pretty dresses and skate to music for a minute or two.
So....to answer your question about sandbagging - yes, it happens, but in the long run, it's really not all that healthy for the skaters. They can't win everything and eventually they will have to move up and adjust.