I wasn't meaning diversify in the sense of having to create new product lines, though I do think even small businesses can do that to a degree. What I mean here is what's the source of your customers and how much of your revenue comes from one or two clients.
Say one customer is supplying 40% of your revenue. Your downs can be attributed to one customer not sending you business for a month and your ups can be one additional job from that same customer. On the other hand if no single customer is sending you more than 15% of your business each month, your ups and downs are much less tied to any single customer.
In that sense diversify means not getting too much revenue from any single customer. Or at least if you notice you do work to get more customers. If a large chunk of your business comes from one customer, know that in a short amount of time your business could be in trouble.
Also where are you getting new customers from. Are they all coming through your one ad in the local paper? All through your phone book ad? Any marketing source could dry up for a variety of reasons. The local paper gets canceled or it's circulation drops. People who used to go to the phone book now go to a search engine.
Diversifying in this sense is making sure there are many ways someone can find you. If your advertising/marketing is limited to a couple of places you're reliant on those one or two places.
And like you said when the economy is down the price of advertising goes down. This past year has been the time to market in more places.
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