How Do Prop Firms Make Money? Business Model Explained [2025]

How do prop firms make money? This is one of the most important questions traders ask—and understanding the answer reveals whether a firm's incentives align with yours. The business model behind prop firms determines whether they genuinely want you to succeed or profit primarily from failed evaluations. This guide breaks down every revenue stream, explains why legitimate firms want profitable traders, and shows you what to watch for in 2025.

How Do Prop Firms Make Money? The 4 Main Revenue Streams

Understanding how prop firms make money helps you evaluate whether a firm is trustworthy and aligned with your success.

1. Evaluation Fees (Primary Revenue)

Evaluation fees are the largest revenue source for most prop firms. When you purchase a challenge, you're paying for:

Access to the evaluation platform
Assessment of your trading ability
Potential access to funded capital

The Math:

Average evaluation fee: $150-500 depending on account size
Pass rate: 5-15% of traders
If 1,000 traders buy $200 evaluations = $200,000 revenue
If 100 pass (10%), firm has 100 funded traders + $200,000

This explains why evaluation fees can seem "cheap" relative to the funded capital—the volume of failed challenges funds the successful ones.

2. Profit Splits (Secondary Revenue)

When funded traders profit, prop firms keep 10-30% (typically 20%):

Trader makes $10,000 profit
80/20 split = Firm keeps $2,000
Consistent traders generate ongoing revenue

This is where legitimate firms' incentives align with traders—they make more money when you succeed.

3. Failed Funded Accounts

Even traders who pass evaluations often fail in funded phases:

Approximately 60-80% of funded traders eventually breach rules
Some firms charge "reset" or "recovery" fees
Traders often purchase new evaluations to try again

4. Spread/Commission Markups

Some prop firms add small markups to trading costs:

Slightly wider spreads than retail brokers
Commission additions
Usually minimal but adds up across thousands of traders

Where Do Prop Firms Get Their Money?

Beyond revenue streams, traders often ask where prop firms get their money to fund accounts:

Evaluation Fee Pool

The accumulated evaluation fees from all traders create a capital pool. Since most traders fail:

Failed evaluation fees exceed funded trader payouts
This surplus funds successful traders' capital
Sustainable model as long as failure rate exceeds certain threshold

External Investment

Some prop firms have:

Venture capital backing
Private investors
Accumulated retained earnings

Liquidity Provider Relationships

Many prop firms have arrangements with brokers/LPs:

Volume rebates from trading activity
Preferential pricing for high volume
Revenue sharing on spread markups

Legitimate vs Questionable Business Models

Understanding how prop firms make money helps identify legitimate vs problematic firms.

Legitimate Model (Sustainable)

Healthy prop firms balance revenue sources:

Evaluation fees: Reasonable pricing, not designed to fail traders
Profit splits: Meaningful portion of revenue from successful traders
Trader retention: Incentive to keep good traders long-term
Fair rules: Designed to identify skill, not trick traders

These firms genuinely benefit from your success—a profitable trader generating consistent splits is worth more than multiple failed evaluation fees.

Questionable Model (Red Flags)

Warning signs of problematic business models:

Rules designed to fail: Impossible conditions, hidden traps
No profit split revenue: Model only works if traders fail
Constant rule changes: Moving goalposts after traders qualify
Payout delays/denials: Finding excuses not to pay

If a firm's model only profits when you fail, their incentives are against you.

The Economics: Why Prop Firms Can Offer Big Accounts

How can firms offer $100,000+ accounts for $200-500 fees? The math works:

Example Calculation

Assume 1,000 traders buy $100K evaluations at $300 each:

Revenue: $300,000
Pass rate: 10% (100 traders funded)
Funded traders who profit: 30% (30 traders)
Average profitable trader profit: $5,000/month
Firm's 20% split: $1,000/month × 30 = $30,000/month ongoing

The firm collects $300,000 upfront plus ongoing profit splits from successful traders. Even paying out the winners, the model is highly profitable.

Why They Want You to Succeed (Eventually)

A consistently profitable trader is valuable:

Generates ongoing profit-split revenue
Provides marketing value (success stories)
May scale to larger accounts (more profit potential)
Refers other traders

This is why legitimate firms have reasonable rules—they want some traders to pass and succeed long-term.

How Different Prop Firm Models Compare

Challenge/Evaluation Model

Most common model (FTMO, TradersYard, FundedNext):

Pay evaluation fee upfront
Pass challenge to get funded
Revenue: Evaluation fees + profit splits

Instant Funding Model

No challenge required (some The5ers programs):

Higher upfront fee or deposit
Immediate funded access
Lower profit splits (often 50%)
Revenue: Higher fees + larger profit share

Subscription Model

Monthly fees for continued access:

Lower initial cost
Recurring monthly payments
Revenue: Predictable monthly income

What This Means for Traders

Choose Firms with Aligned Incentives

Look for firms where:

Profit splits are meaningful revenue source
Rules are fair and achievable
Successful traders are celebrated (marketing value)
Long-term relationships are encouraged

TradersYard exemplifies aligned incentives—their transparent rules, 80-95% profit splits, and scaling programs show they benefit from successful traders.

Avoid Firms That Only Profit From Failure

Red flags:

Impossible rules or hidden conditions
Constant payout denials
Rules designed to trip up profitable traders
No evidence of actual profit-split revenue

Frequently Asked Questions

How do prop firms make money?

Prop firms make money through four main streams: evaluation fees (primary), profit splits from successful traders, fees from failed funded accounts, and trading cost markups. Legitimate firms balance these sources and genuinely benefit from successful traders.

Where do prop firms get their money to fund traders?

Prop firms fund accounts using accumulated evaluation fees, external investment/VC backing, retained earnings, and liquidity provider relationships. The high failure rate on evaluations creates surplus capital to fund successful traders.

Do prop firms want traders to fail?

Legitimate prop firms want a balance—they need some failures to fund the business, but successful long-term traders generate ongoing profit-split revenue worth more than single evaluation fees. Firms with impossible rules that want everyone to fail are red flags.

How much do prop firms make from evaluation fees?

With 85-95% failure rates and hundreds to thousands of monthly purchases, evaluation fees can generate substantial revenue. A firm selling 1,000 evaluations at $200 makes $200,000 monthly from fees alone before profit splits.

Is the prop firm business model sustainable?

Yes, for legitimate firms. The model works because evaluation fee revenue exceeds payout obligations, while successful traders provide ongoing profit-split income. Established firms like FTMO have operated profitably for 10+ years.

Why do prop firms offer such large accounts for small fees?

Because most traders fail. The accumulated fees from failed evaluations fund the successful ones. A $200 fee for a $100,000 account works when only 5-10% of traders pass and generate payouts.

Conclusion

How do prop firms make money? Through evaluation fees, profit splits, failed funded accounts, and trading cost markups. The key insight: legitimate firms benefit from your long-term success through ongoing profit splits, while questionable firms only profit when you fail.

Choose prop firms with aligned incentives—fair rules, meaningful profit splits, and demonstrated interest in trader success. Avoid firms where the business model only works if traders lose.

For a prop firm with transparent incentives, TradersYard offers evaluations from €36 with fair, achievable rules and 80-95% profit splits. Their scaling to $500K shows they profit from successful traders scaling up. Start your evaluation with a firm that wants you to succeed.