It is worth pointing out that :setvar variables are not like variables in a programming language. They are more like constants. I think it works this way: SQLCMD evaluates the value of $(VarName) just once when the script is parsed.

The $(VarName) variables can be set as follows:

1. :setvar VarName a constant string

2. VarName is an environment variable

3. The sqlcmd command line -v VarName=value

This limits the use of :setvar. For instance:

1. you cant select a value from a table and place it in $(VarName) using :setvar.

2. You cant use :setvar in a T-SQL loop.

3. You cant use @VarName variables as parameters for :connect , :r etc.