The Importance of a Good Diversification Strategy in Online Business
We should always strive for diversification in online business…or should we? (tweet this)
Generally speaking, I am a big advocate of diversification and recommend that all entrepreneurs have a well thought out diversification strategy.
My advocation becomes even greater when we wander into the realm of online business, which so often promises money-making miracles through short-sighted snake oil strategies. Although I may be just 27 years old, my entrepreneurial spirit is perhaps of a more advanced age and I am always on the hunt to diversify my income streams whenever possible.
However, I have recently started to think that my near-obsession with diversification may actually be stunting my growth. As such I thought it would be pertinent to cover the topic of diversification in online business here on Leaving Work Behind. It doesn’t matter whether you are completely sold on the concept of having a diversification strategy or have never even considered it before — this post applies to you, your online business, and what direction you should take next.
Why Should We Have a Diversification Strategy?
If we consult the dictionary we find that diversification means to “make or become more diverse or varied”. If we take that back one more step we find that diversify means “to show a great deal of variety”.
So how do we apply that to our online businesses? I can’t of course be talking about diversification of race, age or sex, as for the most part we are running one (wo)man operations. No — I am talking about the diversification of income streams.
Why is that so important? Well call me a pessimist but I live with a healthy fear that the rug could be pulled from under me at any given moment. What if I lose a couple of big clients? What if you guys suddenly realize that you find me really dull and go read someone else’s blog instead? What happens if my business is built around a single stream of income and the well runs dry?
That’s what drives me to obsess over diversification — the concept of having separable streams of income makes me feel far safer about my business’ long term stability. I believe that we should all carry my aforementioned healthy fear and wear it as a badge of honor; as a sign that we are aware of what could happen, and that we’re striving to mitigate what could otherwise be a disaster waiting to happen.
The Problem with Diversification
It may seem like the issue is defined and resolved in that last paragraph, but in the last few weeks it has become apparent to me that diversification represents as much of a problem as it does a solution.
This goes right back to around Spring 2012 when I was considering what project to work on next. I was on the verge of starting a completely new blog — something in an entirely different niche to Leaving Work Behind. I felt that this would be good for diversification’s sake, but thankfully I came to my senses and decided to re-commit to building LWB (as marked by my re-launch at the end of May). At the time the only contribution LWB was making to my business was as a referrals machine for my freelance writing business so it was hardly tapped out in terms of its potential (which November’s successful launch of my freelance writing guide thankfully demonstrated).
This is one small example as to how an obsession with diversification can potentially stunt your business. If I had launched that blog I may never have started work on my guide, and as we speak I might have two moderately successful blogs and not much money to show for it. What’s the point in having a diversification strategy if you have multiple poorly-performing income streams as opposed to a single lucrative income source?
That brings me up to present day as I ponder once more on the topic of diversification. I have an Evernote folder containing no less than seventeen different ideas for future projects, and in the next couple of weeks I intend to pick one and make a start. The question is, which project do I pick?
Weighing Up Diversification Against Short Term Returns
I should ask that question in the context of what I already have built. Let’s take a quick look at December 2012’s income report:
- Freelance writing accounted for the bulk of my income, bringing in around $3,800. Assuming that I neither gain nor lose any clients, I can expect this figure to average $4,000 per month throughout 2013. I think that the likelihood of my average income being drastically affected (in a negative sense) over the next twelve months is fairly unlikely.
- Leaving Work Behind (through affiliate sales and my information product) generated approximately $550, but these numbers are skewed by around $400 of one-off expenses. Based upon January’s figures and my own predictions I would expect to earn between $1,000-$2,000 for the next few months and hopefully more as I continue to grow my audience and optimize my monetization methods.
I have what are arguably two relatively distinct income streams of which one is pretty likely to cover my bills and the other is a promising up-and-comer. So to take us back to those aforementioned future projects, where do I go from here?
Of the seventeen ideas there are five projects that I am particularly keen on. Let me give you a brief overview of those five (without revealing what they actually are — where’s the mystery in that?):
- Two of them would aim to boost traffic to this blog (and hopefully by extension increase income from affiliate sales and information product sales).
- Two of them would introduce a new product/service that is directly related to what I already do and tap into the goodwill of my audience once more (as I did with my information product).
- The last idea is largely separate from my existing income streams, and whilst it is complimentary to the LWB brand and connections I have made and as such wouldn’t involve starting entirely from scratch, I would certainly have to work harder to leverage it compared to the other four options.
If I was 100% committed to diversification I would definitely go for the final option. If on the other hand I was more inclined to maximize short term income and wasn’t concerned with diversification (nor risking the ire of my audience by marketing another product or service), I would go for either the product or the service. Finally, if I was inclined to continue building the LWB brand without feeling uncomfortable with the prospect of “selling” to my audience again, I would pick one of the traffic-boosting options.
So essentially the question is, should I take the longer and rockier road with the possibility of a more diversified income stream down the line or capitalize on what I already have and look to build upon it for more easily leveraged profits?
What This Means for You
Let’s take a step away from my own personal dilemma for a moment and focus on you. Whilst I may not know what stage you are at with your online business, I can assure you that diversification is almost always relevant.
If you are just starting out it may not seem that way (as you have no income to “protect” yet), but at that stage diversification is vital so that you increase your chances of hitting upon a winning formula. After all, I had toiled away for six months, created three completely different websites and written tens of thousands of words before I started earning anything from my online efforts — it was perseverance and a willingness diversify my efforts that got me to that point. Let’s not forget that my initial foray into freelance writing was a complete shot in the dark — what was that if not diversification?
And once you gain some traction, quit your job and commit wholeheartedly to your online business, diversification immediately becomes a major issue (or at least, it should do). Because you have no job to fall back on, it is of vital importance that you look to create separable income streams so that you are covered if one should fail. One cannot diversify too early (as you must first of course create one stream of income before you can consider building another), but as soon as you are paying the bills and feel relatively “safe” you should turn your eye once more to diversification. That is essentially the crossroads that I stand at right now.
Finally, once you are running a highly successful business, your ability to diversify is often defined by the decisions you have made up to that point. If you have always committed yourself wholeheartedly to developing one stream of income then implementing a diversification strategy will probably be quite difficult, but if you have always acted with diversification in mind you may already have a well-diversified business. That in itself is one compelling argument for creating divergent income streams from the earliest stage possible.
So What Am I Going to Do?
The answer to that at this point is “I don’t know”. There is certainly no right or wrong answer to my dilemma — there is only the direction I take and the alternatives I leave behind.
And to complicate things even further, it is not simply a case of “to diversify or not to diversify” (sorry Shakespeare). Other factors come into play, such as the stability of your existing income stream(s) and your immediate financial goals. For instance, if you have a really solid income stream then implementing a conscious diversification strategy is arguably not as important as it would be if your existing business model was built on foundations of sand.
With all of the above intricacies of the topic laid out, I turn to you. Your honest and insightful advice never ceases to amaze me, and since you have a front row seat to the development of my business it only seems right that I appeal to you for your feedback. So what would you do in my shoes? Would you capitalize upon what is already there, or look to create something entirely new in the name of diversification?
I’d love to know what you think so please do not hesitate to leave your opinion in the comments section below. Furthermore, if you have any questions about diversification or would like to share your own musings on the topic, please do not be afraid to ask and/or share!
Photo Credit: timtom.ch