I am so mad. I am just doing cakes on the side to make some extra money...so I have an ad on Craigslist...I just go there...and now there is a chick offering custom cakes for the price of ingredients...then asks for a tip. Her website reads $50-$60 for a custom cake (plus tip). How the heck do you compete with THAT?
You don't try to. She will likely burn-out very quickly with low prices on cakes that should - should being the key word as you don't know what her cakes actually look like - require a lot of work and detail. If your cakes are really tasty and look good, word of mouth will bring you business in addition to your Craigslist ad. Also, if someone has a certain cake in mind and they call around for prices and the baker is way underpriced, then one of two things will happen - (1) they will decide that if everyone else's price is substantially higher then something is fishy about her ad as she couldn't possibly be making any money and will go with another baker or (2) they will grab-up her cheap offer (and this is likely the cake muggle you don't want because they would more than likely be a cheapo and would have been a pain in the rear to deal with anyway as they wouldn't appreciate the art of caking. Charge the prices you feel comfortable with and find your target client. I don't bake cakes for a living but I've learned this with my own profession and from what I've read on CC, the same is true in the caking world.
I wouldn't let it bother me, the cakes you have uploaded show your talent. There is always going to be someone who comes along attempting to under price you, but I figure there are plenty of cake needing, cake buying folks to go around. Keep your chin up, your talent speaks for itself.
Don't compete. Buy her cakes and sell them