Inside the smart plug is a relay, which is basically just a switch that can be controlled electronically. When the smart plug is turned on, it sets the relay to on and power flows; when the plug is turned off, it sets the relay to off and power stops. This is no different than you flipping a switch in your house.
The electronics that control the plug itself are connected before the relay, and thus always have power*, allowing it to talk to the wireless network to get commands.
* Well, baring a disconnect upstream somewhere, such as a power outage.
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