What if Miller and Macquarie Bank are right?

Seven is a magical number - seven colours of the rainbow, seven chakras, seven days of the week, seven continents, and seven wonders of the world.

It also works in business. Seven, plus or minus two, is widely regarded as the optimum size of a team led by one person.  George Miller (1956) coined the phrase The Power of 7 Plus or Minus 2. He concluded the effectiveness of small groups corresponds with seven things being the most effective range of our short-term memory. Miller’s Law says groups larger than 9 soon succumb to quarrels and bureaucracy (SWARM Organisation, 2023).

Check what happens when you apply Miller's Law to today's strata management metrics in Macquarie's 2024 Benchmarking report.

Let's take a typical 7-member strata management team. It manages 3000 lots. At the Macquarie (2024) benchmark, the average revenue is $453 per lot. The average profit margin is 23%. We'll use the study's average salaries.

1x principal (no portfolio)

3 x senior strata managers ($120,000 each and a portfolio of 800 lots each)

3 x strata assistants ($75,000 each and a portfolio of 200 lots each)

1 x accounts / office admin ($90,000)

Revenue – $1,359,000

Wages (excluding principal) - $675,000 (48.3%)

Overheads - $371,430 (27%)

PEBITDA* – $312,570 (23%)

If both Miller and Macquarie Bank are right, you would have to conclude, on these numbers, that the average strata manager with an optimum size team shouldn’t be in business. The profit on risk and effort is too small. And, these numbers include insurance commissions, which in NSW at least, are likely to be banned in 2025.

In some cities, wages in this model are on the light side. For example, in Sydney there would be many strata managers on $180,000 p.a. In this scenario, that alone would cut the principals' earnings before interest, tax, and depreciation to $132,570, or 9.75% of revenue. Margins are too thin.

To make a wage, most principals in this case would take on a portfolio. But then the question arises. Why take the risk and responsibility for so many, and for so much risk, when you are effectively working for wages?

There is only one conclusion. The pricing model is broken. Prices must go up.

Join our February 2025 one-on-one business growth tutorials. Learn to price your services for value and escape the race to the bottom.

*PEBITDA - Principals  earnings before interest, taxes, depreciation, and amortisation