The global markets are increasingly being integrated due to globalization and liberalisation. Drastic changes prompted by technological change are daily transpiring in the agricultural produce marketing which put smallholder farmers’market survival at stake. The notable changes are manifested in terms of value addition and product differentiation. This study was undertaken to identify factors that determine milk value chain choice amongst smallholder dairy in Iringa and Tanga urban. The specific objectives were: to assess and compare profitability between informal and formal milk value chain participants; examining factors that influence choice of milk marketing channels/outlets among smallholder dairy farmers. Purposive and random sampling techniques were employed in selecting 160 smallholder dairy farmers and 62 middlemen. Both descriptive and quantitave techniques (Gross Margin and Multinomial Logistic Regression) were used in data analysis. The enterprises’ profitability between dairy farmers selling milk through the informal and formal milk channels was statistically different (P< 0.05), implying that informal milk channel is shown significantly being more profitable than the formal channel, with a mean difference of 385.00 TZSper litre. The Multinomial Logistic results show that, the highly statistically significant variables at 1% (P<0.01) level of significance are the price offered per litre of milk, family size of household, education level of household head, sex of household head, volume of milk produced, and access to credits. These findings suggest that an adjustment in each one of the significant variables can significantly influence the probability of participation in either formal or informal marketing channels. In view of research findings, several policy proposals are suggested. These include offering reasonable prices price per litre of milk, propelling collective actions, provision of non-price incentives, re-structuring existing dairy institutional arrangements,establishing milk collection centers,encouraging value addition (adoption of best upgrading practices) and investment in dairy processing (empowering SMEs).IDRC through MVCP Project Research Support