We mainly focus on hostel operations but have diversfied in a few small ways.
One way in which the group I manage has diversified is by having a few different property types. We have 2 standard hostels and then we have a long term "hostel", which is specifically designed for people staying 2 months or more (in some cases much more). This place is cheaper (due to the fact that the income is steadier) and has a few more facilities.
We also have houseshares available in apartments around the city.
This diversity, combined with the situation we find in Australia, where people aren't necessarily purely travelling, but may remain in one spot for months at a time, working before moving on, allows us to grab a bit more of the market "progression".
For example, a guest comes and checks into one of our hostels and starts looking for a job. They find a job and want to look for a slightly quieter, place to live and we offer them the opportunity (space permitting) to either move into one of our house-shares, or our long-term hostel - we have more long-term options open to them, meaning we keep their business "in-house", whilst helping them out and they are assured of good quality, good value accommodation that is geared towards travellers.
Another way that we diversify income within the hostel is, as you said, acting as a travel agency, which I think a lot of hostels do. We sell local tours as well as tours further afield and usually take some commission from the tour company for doing this. Staff who sell tours also get to keep half of the commission for themselves as an incentive. I think this is a great service to offer to guests as we find that they really value our knowledge of what is best to do, and the best companies to go with. One of the perks is that occasionally we also get free famils for our staff from the tour companies, so that we know the products we are selling.
This is all we really do, so probably nothing too much out of the ordinary compared to other hostels. I would love to diversify even more into other areas of tourism/hospitality, but just don't have the manpower to be able to do so. There is massive scope for doing other things, I think it's just about judging what is within reach and what isn't.
I'm not going to go too far into my ideas (mainly because I do plan on implementing them someday and don't want them pinched before I do ;) ), but I think the possibilities are endless when it comes to what you can branch into from hostels.
The owner of our group also owns a 4.5* hotel in another area of the country, and I've been there as acting-GM multiple times to fill in while the GM was on holiday, and the skills from a hostel are hugely important - I find hostel staff way better than hotel staff as they have to deal with a much greater variety of situations. Have you ever asked a hotel receptionist to fix your shower? Did they even leave the desk to come and have a look or did they just send a maintenance guy? I bet your hostel staff would have a go at fixing it straight away.
Log in to join discussion