Contribution Margin vs Gross Margin: Key Differences for Growth Modeling

In subscription healthcare, revenue is collected upfront, care delivery unfolds over time, prescription fulfillment introduces cost variability, and retention patterns determine lifetime value. Gross margin can appear healthy while contribution margin deteriorates under refund rates, reshipments, clinician time variability, and escalating paid media costs.

The distinction matters most when modeling growth. If gross margin is used as the primary performance lens, companies risk over-investing in customer acquisition, misjudging break-even timelines, and underestimating operational strain. Contribution margin, by contrast, reflects the economic reality of delivering care at scale.

This article examines contribution margin vs gross margin through the lens of subscription healthcare growth modeling, with specific attention to acquisition economics, retention behavior, and operational scalability.

Key Takeaways

• Gross margin measures delivery efficiency; contribution margin measures growth viability.
• The acquisition strategy must be anchored in contribution margin, not gross margin.
• Refunds, churn, and servicing variability materially compress contribution margin.
• LTV should be modeled on contribution dollars, not gross revenue.
• Sustainable telehealth scaling requires CAC discipline tied to time-to-positive contribution margin.

What Is Gross Margin?

Gross margin measures the percentage of revenue remaining after subtracting the cost of goods sold (COGS). In traditional e-commerce, this typically includes product manufacturing and fulfillment. In telehealth, gross margin generally includes medication costs, pharmacy dispensing fees, clinician compensation tied directly to care delivery, and payment processing costs.

Formula:

For example, if a subscription plan generates $200 in monthly revenue and direct medication plus clinician costs total $80, the gross margin is 60%.

At a surface level, this metric signals unit profitability. A higher gross margin suggests pricing strength, cost efficiency, and potential scalability. However, telehealth introduces complexities that distort this signal.

In subscription healthcare:

• Medication costs fluctuate with dosage adjustments and reshipments.
• Clinical labor does not scale linearly with revenue.
• Refunds, chargebacks, and regulatory-driven cancellations impact realized revenue.
• Care pathways extend across multiple touchpoints rather than a single transaction.

Gross margin captures product-level efficiency but does not capture customer-level economics. It answers whether a treatment plan is priced above its delivery cost. It does not answer whether the customer acquired through paid media contributes positive dollars after acquisition and operational variability.

For early-stage operators, gross margin often appears sufficient. As paid acquisition scales and retention volatility increase, its limitations become structural.

What Is Contribution Margin?

Contribution margin measures how much revenue remains after subtracting both variable delivery costs and customer acquisition costs. It reflects the actual dollars that contribute to fixed overhead and eventual profitability.

Formula:

In telehealth, variable costs extend beyond medication. They include:

• Pharmacy fulfillment and shipping variability
• Clinician review time is tied to case complexity
• Payment processing fees
• Refunds and chargebacks
• Customer support volume tied to onboarding friction
• Promotional discounts

When acquisition is layered in, the picture changes significantly.

If a customer generates $200 in monthly revenue with $80 in delivery cost, the gross margin is 60%. However, if the acquisition cost (CAC) is $120 and the refund-adjusted revenue falls to $180, the contribution margin may be negative in the early months.

Contribution margin reflects the economics of growth. It connects marketing spend, operational execution, and retention behavior into a single performance signal.

In subscription healthcare, contribution margin becomes more important than gross margin because:

• Revenue is recurring but not guaranteed.
• Care delivery costs fluctuate across patient journeys.
• Regulatory compliance can increase servicing time.
• Advertising costs vary by channel and seasonality.

A company can report a 65% gross margin and still burn capital if acquisition costs are not disciplined relative to the per-customer contribution margin.

The distinction between contribution margin and gross margin becomes most pronounced at scale. Gross margin indicates whether the product is profitable. Contribution margin shows whether growth works.

Operational Differences in Subscription Healthcare

Subscription healthcare is structurally different from e-commerce and pure SaaS. Those differences materially affect how the contribution margin vs. gross margin should be interpreted.

Clinical Workflow Delays

Revenue may be collected at checkout, but care delivery unfolds after clinical review. If documentation is incomplete or requires follow-up, clinician time increases. That labor expansion does not always reflect in the COGS assumptions built for gross margin modeling.

In high-volume telehealth programs, even small increases in review time can compress contribution margin when scaled across thousands of cases.

Prescription Fulfillment Variability

Medication reships due to address errors, dosage adjustments, or patient adherence issues introduce cost volatility. Gross margin models often assume stable fulfillment costs. In practice, real-world prescription workflows introduce variability that erodes contribution margin over time.

Refund and Chargeback Dynamics

Healthcare purchases exhibit higher refund sensitivity than traditional e-commerce purchases. Patients expect outcomes, not just products. When expectations are misaligned, refund rates increase. Payment disputes and chargebacks compound this effect.

Gross margin calculations typically assume recognized revenue. Contribution margin must account for realized revenue after refunds and dispute fees.

Retention Economics

Telehealth subscriptions rely on behavioral adherence. Patients may churn after one or two cycles if onboarding is weak or expectations are not reinforced. Gross margin per order may look strong, but lifetime contribution margin may fall short if retention curves flatten prematurely.

Operational Strain Under Scaling

As acquisition volume increases, operational friction compounds:

• Clinician bandwidth constraints
• Customer support backlog
• Inventory variability
• Compliance documentation requirements

Gross margin does not capture this strain. Contribution margin reflects the cost consequences of scaling without operational readiness.

When evaluating contribution margin vs gross margin in subscription healthcare, operational variability is not peripheral. It is central to accurate modeling.

Why Gross Margin Is Not Enough for Acquisition Strategy

Paid media decisions should not be anchored to gross margin. Yet many operators calculate allowable CAC by multiplying the gross margin percentage by the average order value.

This approach creates distortion.

If gross margin is 65% on a $200 subscription, leadership may conclude that up to $130 can be spent on acquisition profitably. However, this ignores:

• Refund-adjusted revenue
• Payment processing and dispute fees
• Support costs tied to new user onboarding
• Channel-level CAC inflation
• First-cycle churn

The acquisition strategy must be anchored to the contribution margin per customer over a defined time horizon.

For example:

• If the first-month contribution margin is negative but month three becomes positive due to retention, acquisition can still be justified.
• If the contribution margin remains negative beyond the expected churn horizon, scaling paid media accelerates the rate of losses.

In telehealth, acquisition and operations are interdependent. Higher CAC often correlates with broader targeting. Broader targeting may reduce patient fit. Reduced fit increases refunds and churn. That dynamic feeds back into contribution margin.

Gross margin cannot capture that feedback loop. Contribution margin can.

Additionally, channel-level ROAS (Return on Ad Spend) is frequently misinterpreted. A campaign may show 2.5x ROAS on gross revenue. If the contribution margin after refunds and variable servicing costs is thin, true incremental profit may be negligible.

Using gross margin alone can result in:

• Over-aggressive paid scaling
• Underinvestment in retention infrastructure
• Delayed recognition of operational bottlenecks
• Capital misallocation

In the context of contribution margin versus gross margin, gross margin is a product-efficiency metric. Contribution margin is a growth viability metric.

Executive Modeling Implications

For executive teams modeling growth, the distinction shapes strategic decisions across pricing, channel mix, staffing, and inventory management.

Pricing Strategy

Pricing must support both gross margin integrity and contribution margin sustainability. Discount-driven acquisition may preserve gross margin percentage but compress contribution margin when layered with CAC.

Executives should model:

• Net revenue after refunds
• Channel-specific CAC
• Variable clinical servicing cost by treatment complexity
• Time-to-positive contribution margin

Without this layered view, pricing experiments can generate misleading signals.

Channel Mix Decisions

Different acquisition channels produce different patient profiles. Some channels may yield higher-intent patients with stronger retention curves. Others may generate lower-quality leads with elevated refund risk.

Contribution margin analysis allows leadership to evaluate channel performance beyond surface ROAS.

A channel with lower top-line volume but higher contribution margin may be strategically superior.

Capacity Planning

Growth modeling must integrate clinician staffing and pharmacy throughput. If acquisition increases 30% month-over-month without matching operational capacity, delays increase churn probability.

Contribution margin modeling should include:

• Average clinician minutes per patient
• Support ticket cost per new subscription
• Incremental fulfillment complexity

Gross margin remains static in these scenarios, while contribution margin compresses under strain.

LTV to CAC Framing

Lifetime value (LTV) must be contribution-based, not gross revenue-based.

An LTV calculated using gross margin, without accounting for servicing variability, retention decay, and refund impact, will inflate allowable CAC thresholds.

When modeling LTV in subscription healthcare, executives should integrate:

• Cohort-level retention curves
• Variable cost trends across refill cycles
• Refund timing distribution
• Payment dispute frequency

The outcome is a contribution-based LTV that anchors disciplined acquisition.

Conclusion

The distinction between contribution margin and gross margin is foundational for telehealth growth modeling. Gross margin measures the efficiency of delivering care. Contribution margin measures the viability of acquiring and retaining patients at scale.

In subscription healthcare, revenue is recurring but operationally complex. Clinical workflow variability, prescription fulfillment dynamics, refund exposure, and retention behavior introduce cost layers that gross margin alone cannot capture.

Gross margin can signal product health. Contribution margin determines whether scaling that product through paid acquisition generates sustainable economics.

Actionable Takeaway

Executive teams should anchor the growth strategy to the contribution margin per customer rather than the gross margin percentage. Build acquisition thresholds based on refund-adjusted revenue, variable servicing costs, and cohort-level retention curves. Integrate operational capacity modeling directly into CAC decisions. Growth should be funded by positive contribution margin within a defined time horizon, not by optimistic gross margin assumptions. This discipline prevents over-scaling, preserves capital efficiency, and aligns marketing velocity with operational reality in subscription healthcare.

References

1. Hayes, A. (n.d.). Contribution margin: Definition, formula, and examples. Investopedia. https://www.investopedia.com/terms/c/contributionmargin.asp
2. Hayes, A. (n.d.). Gross margin: Definition, example, formula, and how to calculate. Investopedia. https://www.investopedia.com/terms/g/grossmargin.asp