Members of the fashionable London society crowd leave the Royal Opera House in Covent Garden, then have to shelter from a sudden rainstorm. A flower girl, Eliza Doolittle, sees her chance to make some money by selling violets from her basket. Unknown to everyone, Higgins, a professor of phonetics, has been eavesdropping on their conversations and making notes of their dialects. He can place their class and background simply by the way they speak. This impresses Colonel Pickering, who has come to London expressly to meet him. Eliza hears Higgins say that he teaches pupils to speak better English, and some days later she calls on him to ask for lessons, so that she can work in a flower shop.

At first, Higgins is reluctant to take her on, as he has enough examples of the Cockney dialect, but he eventually bets Pickering that he can turn her into a society lady within months. Eliza moves into his house, and undergoes Higgins' intensive course of teaching in speech, etiquette, dress and deportment. Eliza's father comes to see what is going on, thinking he can get some money out of Higgins for taking his daughter, but Higgins distracts him by praising Doolittle's unique philosophy of life.

To put his experiment to the test, Higgins takes an elegantly dressed Eliza to one of his mother's tea parties, where she meets Mrs. Eynsford-Hill and her son Freddie. Eliza's pronunciation is immaculate but her conversation is outrageous. Everyone thinks this is the new small talk, and she is a big success, especially with Freddie, who falls in love with her. Encouraged, Higgins plans an even bigger test - to take Eliza to a grand diplomatic reception at the Embassy. He is disconcerted to find, on arrival, that one of the guests is a former pupil, a Hungarian called Karpathy, who now teaches phonetics himself. Karpathy is intrigued by Eliza and determined to find out who she really is. It looks as though Higgins' bet will be lost, but Karpathy decides that Eliza's English is so good, she could only be foreign royalty.

Higgins and Pickering congratulate themselves on the success of their experiment, completely ignoring Eliza, who has worked so hard to win the bet for the professor. She is furious, and leaves the house, but realises that she is now unfit for anything. She cannot return to her old life and she is not qualified for any other. She has also fallen in love with Higgins, who has no further use for her. Even her own father no longer recognises her. Higgins has changed his life, too, by recommending his philosophy to a friend who now has Doolittle lecturing all over the country. Doolittle has so embraced middle-class morality that he is going to marry Eliza's mother.

Eliza takes refuge with Higgins' mother and when he finds her, she taunts him with her plans to set up as a rival teacher and marry Freddie. Higgins suddenly realises that he cannot do without her, and she returns to his house.