It will fill with water and you put it on, wet. What water is in the bag will be warmed by your body heat. Outside the bag, you'd be trying to warm the ocean. I would try to get it as tight as possible to avoid having to heat any more water than necessary.
This is exactly right. BTDT and it works. As Sarah notes, it's easy to experience what a difference it makes. In my experience it will do a few degrees (2-4?), better than just a plain non-reflective bag. That's a good deal better all things considered. The plain bag works as well, just not quite as good and they don't cinch up closed like the LAND/shark does. That is a huge advantage in the water.
The plain bag was popularized over here by Ken Burton and was well known in survival circles as a Burton Bag, which he handed out to those who took his aviation overwater survival courses in the 80's and early 90s (still have a couple). The LAND/shark evolved from that after Neil attended one of Ken courses (I was there). Next year, Neil brought prototypes of the LAND/shark, if I recall correctly, or it may have been to another event, maybe one of my early life raft tests. Been a while. <~>
It is far better than nothing, but it isn't a substitute for an exposure suit or similar products. OTOH, it isn't as bulky or as expensive. It has its place in the range of options for those who might end up in the drink, depending upon location and operating and carriage environment.