Questions: Soil resource heterogeneity influences the outcome of plant–plant interactions and, consequently, species co-existence and diversity patterns. The magnitude and direction of heterogeneity effects vary widely, and the processes underlying such variations are not fully understood. In this study, we explored how and under what resource conditions small-scale heterogeneity modulates grassland plant diversity. Location: Oderhänge Mallnow, Potsdam, Brandenburg, Germany. Methods: We expanded the individual-based plant community model (IBC-grass) to incorporate dynamic below-ground resource maps, simulating spatial heterogeneity of resource availability. Empirical centimeter-scale data of soil C/N ratio were integrated into the model, accounting for both configurational and compositional heterogeneity. We then analyzed the interplay between small-scale heterogeneity and resource availability on the interaction and co-existence of plant species and overall diversity. Results: Our results showed significant differences between the low- and high-resource scenarios, with both configurational and compositional heterogeneity having a positive effect on species richness and Simpson's diversity, but only under low-resource conditions. As compositional heterogeneity in the fine-scale C/N ratio increased, we observed a positive shift in Simpson's diversity and species richness, with the highest effects at the highest level of variability tested. We observed little to no effect in nutrient-rich scenarios, and a shift to negative effects at the intermediate resource level. The study demonstrates that site-specific resource levels underpin how fine-scale heterogeneity influences plant diversity and species co-existence, and partly explains the divergent effects recorded in different empirical studies. Conclusions: This study provides mechanistic insights into the complex relationship between resource heterogeneity and diversity patterns. It highlights the context-dependent effects of small-scale heterogeneity, which can be positive under low-resource, neutral under high-resource, and negative under intermediate-resource conditions. These findings provide a foundation for future investigations into small-scale heterogeneity–diversity relationships, contributing to a deeper understanding of the processes that promote species co-existence in plant communities.