-You charge less than the going rate because "I'm just starting out and I can't charge full price." Why not? If you're good enough to sell cakes you should be good enough to charge at least at the low end of the price range in your area. If you feel like you can't charge full price then maybe you need to stop selling and practice some more.
-You charge less than the going rate because "I work from home and my overhead is lower than if I ran a shop." Well, not necessarily. If you have a shop you can reduce some of your costs by buying in bulk, and by producing more in a shorter time using commercial equipment. A lot of shop owners earn a lot more than home bakers, even with the overhead of a storefront. Of course, many don't earn more, but why should you penalize yourself by charging less just because you work from home?
-You charge less because you have an arrangement with another business to trade kitchen space for cakes, or some other weird setup like that. There are plenty of incestuous little arrangements like this...Someone works in a kitchen on the payroll or off, making cakes for the business in exchange, and charges low rates to lure customers in so that they buy more from the other parts of the business (catering, parties etc.) The cakes basically end up being a loss leader for the business.
So what does this kind of thing result in? It results in business being drained off of other local businesses that are charging more realistic prices. "Well so what?" says the undercutter, "It's just competition!" Competition is one thing, but if someone is undercutting and getting so much business that they're draining it off of other area bakeries it will affect everyone in the long run.
The baker who's undercutting will get burned out and close shop eventually. Or they'll have an epiphany and raise their prices and all of their "loyal customers" will disappear because they'll all defect to Walmart.
The existing businesses that are being drained of business will be hit it the wallet, and some of them will end up closing. Some will think that dropping their prices is the only option, and their profits will suffer.
The customers in the area will start thinking that cakes should cost much less than they're worth, and will end up being trained to look for the cheapest price. The bar will have been lowered, and it's hard to raise it after that.
Of course, there will always be a group of people who are willing to pay what something is worth. Trouble is, that group is much smaller than the group that bargain hunts. When it comes right down to it, most people are willing to compromise on quality if it will save them some money. Even if they buy from the cheaper person once then come back, that's one cake that the baker didn't sell. Multiply that by 40 or 50 customers and you have a problem.
So if you're not charging enough for any reason, stop it. Just stop it. You're not doing anyone any favors, including yourself. Charge the market rates, even if you're at the low end of the range.
Kara Buntin owns A Cake To Remember LLC in Richmond VA, and cake supplies online at www.acaketoremember.com and www.acaketoremember.etsy.com