in the above SQL code.

• What is the advantage of using the latter method?

This allows the script to be called from the cmd line tool sqlcmd.exe with variables passed in e.g.

sqlcmd -S localhost -d Master -q "SELECT '$(var1)' as [$(var2)]" -v var1="Mooooo" var2="Cows Say"

and also allows you to use a script against multiple instances using the :connect option

:setvar word "now"

:SETVAR server1 "SERVERNAME01"

:SETVAR server2 "SERVERNAME02"

:connect $(server1)

SELECT @@servername,'$(Word)' as [Word]

GO

:connect $(server2)

SELECT @@servername,'$(Word)' as [Word]

GO

• Is there a way I can use the latter method from outside of SQL Server Management Studio (like when I'm using SQL commands in some app)?

yes using the sqlcmd line as above

• In SQL Server Management Studio, I don't see any indication when SQLCMD Mode is enabled or it's not, so if I forget whether I’ve enabled it, I just have to play with it to find out for myself. Am I missing something? How can I tell?

the :setvar will go grey when enabled