The Importance of a Good Diversification Strategy in Online Business

Man at a crossroads

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.

Successful Freelance Writing Online

A move away from diversification led to the successful launch of my information product.

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

Comments

  1. says

    I’m not sure you have to diversify by building something else.

    Personally, I’d be more concerned with diversifying my traffic sources rather than building new websites because I can’t see how a ‘brand’ would falter. You talk about people getting bored of you, but I doubt you would fair any better trying to cater to two different audiences. Surely it’s better to know one inside out.

    I would keep everything on the one site, so my opinion (and complete guess) would be to build another revenue stream for LWB. Once you diversify your traffic and revenue streams I think that is what you call a solid foundation.

    • says

      Hi Jamie,

      This again is my perhaps irrational fear of disaster surfacing, but just because we do not perceive risk does not mean it isn’t there. However, I do appreciate where you’re coming from and do think you have a point.

      I was actually speaking to a friend of mine a couple of hours ago and she put it to me that my obsession with diversification could be as much to do with my desire to push myself into the unknown then it is to reduce risk. I think she’s got a point — if I stayed entirely within my comfort zone I think I would feel unfulfilled. That is perhaps as good an argument as any to commit to diversifying (at least to an extent).

      Cheers!

      Tom

      • says

        Stagnation is dull. I say follow your interests! You are smart and savvy enough to make it happen. But of course, I find your LWB posts interesting… so keep ‘em coming! I feel very strongly about bursting your comfort bubble.

  2. says

    Interesting point Tom,

    At first Diversifying seems like playing “wack a mole” with two mallets, a great idea.

    Later it seems like your in worst shape once the number of moles more than doubles making it much harder to “wack a mole” them even with the extra mallet.

  3. says

    You are at a place in your career where you have the luxury of choice, so ask yourself which challenge you want more.

    Is growing and guaranteeing your income more important right now? (As in, do you have dependents? Debts? Plans to acquire either?)

    Or can you afford (both financially and otherwise) to work on something where the financial benefits are more long-term just for the fun of it?

    Also ask yourself how long pursuing the efforts to build income quickly will make you have to postpone the other, long-term projects? A couple of months should be less of a sacrifice than say six months or a year.

    • says

      Hey Faith,

      I am unencumbered by debt or dependants so that obviously works in my favor. I can afford to commit to more speculative projects but ultimately I want to commit to the right one — i.e. the one that fulfils me the most and/or makes me the most money.

      It’s less a case of building income quickly and more a case of building diverse income streams (or not). I think I can afford not to diversify but I am drawn to doing it at the same time! Which is rather confusing…

      Thanks for sharing your thoughts!

      Tom

  4. says

    I think this is a really interesting question. I’m firmly behind the idea of diversification. The reason I’m here is to find alternative ways to make a living (as I’m sure many of us are). My day job as an IT contractor means that I sometimes have periods with no work and so no income, it’s just the nature of the beast. Getting paid to write is one of the ways I am trying in order to plug those gaps in the short term, and then possibly take over long term.

    I guess what I’m saying is that there are even more ways to diversify than just expanding your online business interests in a different direction. Just having an online business can be the diversification in itself :-)

    My opinion on your situation as you’ve described it is that you already have two distinct income streams, one bigger and more dependable than the other. I would focus on growing LWB to the point that it is as strong and dependable as your freelance writing before moving off into totally new and unexplored territory.

    Either way as you know it’s all about committing to what you decide and not trying to second guess it, a failing I often have!!

    Good luck with whichever one you decide on.

    • says

      Fair point there David — a side income in itself can be a means of diversification! But since the title of this blog is “Leaving Work Behind”, my general assumption is that you won’t be sticking in your job for the long term ;)

      Your argument for continuing to grow LWB is both simple and compelling. Certainly food for thought. Thank you!

      Tom

  5. Nick Di Fabio says

    Hi Tom!

    My suggestion: can you try to do both?

    I think capitalizing on what is already there will be a relatively stable bet for you and an almost near guarantee on another income stream. One example I can think of is Leo from Zen Habits. He’s developed a number of e-books, resources and other training materials at a very attractive price point. Of course, his blog attracts an insane number of people and subscribers however I know for a fact that I would be interested in some sort of LWB related e-Book or podcasts or training program on how to actually leave work behind.

    In terms of creating something completely new, I think you should totally do it! You’re entrepreneurial experiences (especially online) provides a huge reservoir for you to draw from to make this new project a success.

    Due to time constraints, it may take a little longer to complete both projects but my philosophy is one of progress. Am I progressing? If the answer is yes, I think you will have yourself the best of both worlds. One sustainable new income stream and one completely new venture that is more challenging and fulfilling.

    Best of luck,

    Nick D.

    • says

      Ah Nick, thank you for stepping in and playing the devil’s advocate role! If I were to take the “diversification project” I would still of course work on building LWB and as such would be working on both. But if I went with the “non-diversification project” I would be sticking solely with LWB for the time being. I guess the dilemma essentially is do I go 50%/50% into both pots, or 100% into non-diversification?

  6. says

    The hard part I’m having, at this time, is finding the time to actually build these alternate streams.

    I’m really close to where you are:

    About 70% of my income comes from freelance writing and the other from my blog ventures.

    However, I don’t want to take the risk of losing a client or two and basically having everything come to a crumble.

    The hard part is that since we’re trading time for money – there’s not much wiggle room to work on new items unless we cut, significantly, into our free time which, as you know, is very important for keeping the sanity.

    One idea I had been thinking was starting up an article marketplace. Doesn’t need to be anything big but just updated enough to pull in an extra $1k or so off to the side when I have those creativity spikes and I want to write.

    Maybe that’s what you should do too?

    Find those horizontal ventures.

    For example: you’re now experienced with writing, editing, and publishing an ebook. You could take that into a new area of your services to existing clients or make it something off to the side.

    I know InDesign enough that I could offer it but I have some other plans for a secret project I’m working on at the moment.

    Basically, I’d suggest taking some of the leftovers, getting it out there, see how well they perform, and make a decision based on that, ya know?

    • says

      Hey Murray,

      To be honest I have no interest in expanding upon the services I am offering at the moment for two reasons:

      1. I don’t think that represents “real” diversification
      2. Three or so hours of freelancing work a day is enough for me

      None of my new project ideas are services based — they’re all passive income. And that’s how I like it because that’s the side of the business I want to develop further. I love the fact that my freelance business is ticking over nicely and doesn’t take too much of my time because it means that I can concentrate on other endeavours. I don’t want to change that balance.

      Cheers!

      Tom

      • says

        Understandable.

        Being an entrepreneur you are – it makes sense that you wouldn’t want to stick to just the same roll.

        Hrm …

        I guess a few obvious routes could be:

        A. Kindle books
        B. Membership sites
        C. Authority “walkthrough” sites

        The later (C) is something I want to give a try. It wouldn’t be niche (per se) but it would basically be a full, free course online that gave people the 1,2,3 step approach to learning it.

        For example: Beer Brewing

        First “page” (step) would outline all the necessary items to get started.
        Second “page” would go over the pre-setup

        So on and so forth.

        You get the satisfaction of working on a new (passive) project and it brings great value to the Web seeing that it could be highly detailed and free.

        You inject Amazon Associates for the physical items, a bit of affiliate products for additional resources, and you could probably integrate a small forum for people to ask questions and give answers.

        I don’t know, I’ll have to get back to you on something like this. I think it’s viable if done right.

  7. says

    This was one of my first and hardest lessons when I started my online business. I had a personal site that was never more than a place to rant and a niche site that, I discovered after developing it, happened to be *very* seasonal in nature. It took me more than two years to recover and start creating multiple niche sites that weren’t *as* subject to the seasons of the given market. The bottom line: if you’re going to make a site that targets exclusively valentine’s day products, you will likely find traffic (and thus revenue) dries up significantly in late February.

    • says

      That’s a good lesson to learn! I’ve never been hit by the seasonal issue and it is something that I have read about enough to avoid (I hope). Having said that, seasonal can have its benefits…

  8. says

    For me, diversification is not just having multiple income streams but also having some assets in various niches. But this is because I started with “flash game” niche and wanted to do something “more serious”.

    On the other hand your situation is quite different. Make money online niche is a very broad one, which means that you can do virtually anything from blogging about SEO strategies, blogging about leaving the work behind like you, being everyhwere like Pat Flynn, etc. This is why I think that for you diversification in another niche is not necessary. The niche is broad enough to “shift” to something else if the primary market is down for any reason. However it is a good idea to diversify your income streams by either creating new products or by expanding your reader’s base using some of the tips from Pat’s strategy. Maybe a podcast or video training course (such as Fizzle) would be a nice addition to LWB.

  9. says

    Great advice and insights all the way around. Sounds like you are at the crossroads of a decision that will eat away your time and really don’t want to waste any of the precious time you have in following a project that may not pan out (digging for gold are we?). From what I see and read here, you have a fantastic site and it absolutely can be developed further, I wouldn’t worry about offending readers by offering more products for sale. I think everyone is savvy enough to understand that many web sites and bloggers are in the realm of making money online. Just be sure to consistently offer good free content as well, which you most obviously do, hooray!

    Then, the other thing I seemed to glean from your post is that you want to soar, dive into something new and challenging, but fear it may not produce those gold nuggets. Being a miner is not an easy task, so I would suggest and you probably have already worked this out is plan it out, how much time, the cost and for how long are you willing to devote to a ‘side’ or new endeavor, before you expect an ROI.

    And, you never know your new projects may actually lead you to places you never dreamed. You have questioned yourself previously where would your previous sites be now if you would have keep them up and running. I see you as an adventurer and think you already know what you are going to do, be fearless.

  10. Tim Elliott says

    Hi Tom
    The main problem for me with diversification is that I keep having new ideas and start to implement them without fully completing the last idea. And so revenue is not what it should be.

    Therefore I would say developing LWB further to increase your audience and create further revenue streams for that audience would be your best bet.

    But whatever you chose, don’t let LWB take a back seat. If you stop (or slow) creating great content for this website you’re more likely to lose subscribers, and adversely affect your current business model.
    But you already know that.
    Cheers
    Tim

    • says

      Hey Tim,

      Sound advice and rest assured that no matter what I do LWB won’t be taking a back seat. I am fully committed to this blog and I certainly won’t be slowing things down (it might just be a case of not doing even more).

      Your argument that I should continue to develop what I already have is a sensible one, and plays a big part as a factor in my final decision.

      Cheers,

      Tom

  11. Michael Tully says

    Good morning, Tom,

    The question of how and whether to diversify can be answered by reference to your tolerance for risk. Allow me a metaphor from the oil and gas exploration industry, with which I’m familiar.

    Are you a wildcatter or a developer?

    A wildcatter drills exploratory wells in regions where nobody else has drilled before. His chances of finding oil, even with best available geological and geophysical data, are typically one in ten. Drilling a well, wet or dry, is costly, so he’s risking tens of thousands of dollars on a one-in-ten play. But if he finds oil, he wins really big, because there’s nobody else in the area and he has first shot at developing his newly discovered oilfield.

    A developer drills wells adjacent to known producing fields. His chances for success with a new well are much improved (maybe 50-50 or better), so it’s a safer bet, but because he’s not the only player at the table, the reward for his success wil be proportionately less.

    Your first two options look like development wells to me, while the last one is a wildcat prospect. When I was your age, I considered myself a wildcatter, but now, 30+ years later, I’m a confirmed developer. It all has to do with what resources are at risk compared with the potential for reward and, very importantly, the time frame within which you must realize your reward or recoup your losses.

    I’m not sure this is at all helpful, and I’ve probably been too verbose, but that’s your situation as I see it.

    Peace,
    Michael

    • says

      Hey Michael,

      I think you’ve nailed it with that metaphor — that is almost exactly how the two options stack up.

      I think at this stage I know what I want to do — the sensible thing is now to take one project from either side of the diversification debate and properly consider the risk to reward ratio. Until I have a better handle on that it’s perhaps all just academic.

      Having said that, at this point I would be surprised if I didn’t go for the more speculative project first :)

      Cheers,

      Tom

  12. says

    For some reason unknown to me, the universe seems to be guiding me in a path at least parallel to the one you are taking. Diversification is something I, too, am contemplating lately.I will be most interested to see where you go with it. If it helps, I’m pulling for your success. ;-)

  13. says

    Many people think about diversification only when it is too late. They may be getting a steady income from Adsense and then one day, their account is closed and the panic strikes. However in my opinion, diversification is not only about find alternative sources of income but also other ways to get traffic to your site because without any traffic, your income is none.

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