This paper aims to understand the relationship between households’ livelihood strategy and soil management using commonalities among rural households. We grouped households into four distinct types according to similar livelihood diversification strategies. For each household type, we identified the dominant income-generating strategies as well as the main agronomic activities pursued. The household types were: (I) households that pursue a cereal-based livelihood diversification strategy (23 %); (II) households predominantly engaged in casual off-farm-based strategy (15 %); (III) households that pursue an integrated livelihood strategy (38 %); and (IV) households with a potato-based strategy (24 %). We then explored the relationship between these household types and improved soil management practices. The results showed that households generating their income primarily by growing potatoes(Type IV) were not only economically “better off” but also more likely to undertake improved soil management practices than those pursuing less economically rewarding, cereal-based (Type I) or casual off-farm-based (Type II) livelihood diversification strategies. This was largely attributed to differences in access to institutional capital that determined the degree of agronomic orientation, rather than household assets, such as age, education level of the head, and family labour. Orienting lower income households toward input and output markets through improving their access to institutional capital may help build livelihood strategies with high-economic return that in turn provide incentives to undertake improved soil management practices. The identified household types may guide entry points for development interventions targeting both food security and agricultural sustainability concerns in the central highlands of Ethiopia. The approach can be applied to different geographical regions with similar livelihood circumstances. Development actors need to take into account the specific contexts of their regions and resources needed to develop a typology when designing pathways for any targeted interventions.