Peter Cohan, principal of The Second Derivative, offers some great advice on construction compelling software demos (or any type of corporate pitch, really). His tips are intuitively obvious, but infrequently followed, at least in the hundreds of pitches I've sat through:
1. It's not about you, your company, or your needs. It's about the audience and their needs.
2. Demonstrate that you've done some research on the pain your product/service solves for that individual or company.
3. Show a real result.
4. Reduce the number of clicks in your demo. The more complex the demo, the less people will understand.
and my favorite tip:
5. Leave 75-80% of the time for Q&A
It's not about you, it's about them, their needs and their questions.
You can see a video of his presentation if you care to register.