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Yes, it does work. It works really, really well, in fact.
Except, it isn't really suitable for things like webhosting. The perfect product to promote this way is something trendy, with viral potential.
For example, let's say you are promoting some "extreme" new energy drink. Normal advertising might work to a certain extent, but it will pretty much kill the trendy underground image the product needs in order to be successful.
Now, instead of using billboards and such, you could try guerilla marketing. Give the drink for free to people in extreme sports, DJs, etc. Have people in "trendy" clubs order it. Have people post about how awesome it is on blogs and message boards. Have "cool" people drink it and talk about it on the streets.
Pretty soon, your product will be known throughout the trendsetting communities. From there, it has the potential to grow virally, while keeping the cool, underground image that makes it sell.
And yes, it works - it's how Red Bull got to where it is.
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