A sound breeding objective is a basis for genetic improvement in the overall economic merit of farm animals. This study aimed to define smallholders' sheep breeding objectives using a conjoint‐based choice experiment and bio‐economic model. Multinomial logistic regression analysis showed differences (p < 0.001) among the derived weights allocated by farmers to body size, twining rate, mothering ability, libido, tail type, colour and lambing interval which formed the high priority traits. The likelihood values of farmer's top three preferred traits for ram were body size (0.659 ± 0.009), tail type (0.325 ± 0.016) and libido (0.247 ± 0.016) while body size (0.459 ± 0.010), twining rate (0.313 ± 0.010) and mothering ability (0.261 ± 0.010) were more preferred traits for selection of breeding ewes. Conjoint‐based choice experiment and bio‐economic model indicated that live body weight at 6 months of age, twining rate (litter size) and mothering ability (preweaning lamb survival) were the most economically important traits of the breeding ewes. A genetic improvement by one genetic standard deviation (σa) in these traits resulted in a profit of Ethiopian Birr 36.03–60.47/ewe/year. A fair correlation (r = 0.63) was observed between farmers' traits preference (conjoint‐based choice card experiment) and the estimated economic value of traits indicating a good relationship between farmers' preferences for traits and economic values of the traits. This would indicate that weighting traits in selection indexes with farmers' trait selection using a conjoint‐based choice experiment would direct genetic improvement towards desired profitability. Moreover, the fair correspondence between the two methods suggests that bio‐economic modelling, if designed properly considering farmers' concerns, could be used to reflect farmers' breeding objectives. Therefore, for reasonable genetic progress and sheep flock profitability, more attention should be given to litter size, preweaning lamb survival and body weight at 6 months of age as they are preferred by farmers and their economic weights. Further, research on the modalities for complementary use of the two methods to define breeding objectives under smallholder conditions is warranted.