But why should YOU charge less, just because THEY don't want to pay more? If they really want the cookies, they will pay for them, I promise you.
Bakeries can charge that kind of price because they aren't decorating the cookies....basic butter cookies are relatively cheap to produce, and don't require much time to make. You aren't competing with butter cookies - you're competing with decorated sugar cookies, and in that case, you really shouldn't be charging anything less than $1.50 - $2.00 per cookie..MINIMUM.
I know you would like people to order your cookies - but at less than a dollar a cookie, you're pretty much paying the customer, rather than them paying you. Do you want people to order from you because you're cheap? Or would you rather the focus be on the quality and uniqueness of what you make?
I'm sorry if this seems harsh - it just bugs me when I see decorators willing to give their hard work away. I don't walk into a store, and expect the owner to lower prices until they're in line with what I think a product is worth. The price is the price, and I either choose to pay it, or I don't. Why should you operate your business any differently? Not everyone will want to pay $2 for a cookie - but plenty of people will. A quick search of websites advertising decorated cookies (including plenty of amateur work) will show you that very, very few people price below $1.50 per cookie.....there's a reason for that. Follow the market, and get it out of your head that bakeries are your competition. They aren't! In addition to the fact that bakeries typically WON'T take the time to produce decorated cookies (beyond something very basic), bakeries also get wholesale pricing on things like flour and sugar...and often use cheaper margarines and in some cases, even cookie mixes, to make their products. You're baking from scratch with whole ingredients, without benefit of wholesale pricing.....they just aren't your competition. Whether you're making cakes or cookies, your pricing should never be less than what your local bakeries charge.
Please, please, please - don't undersell yourself!