A product demonstration is not to be confused with a product presentation. Product presentation focus on the problem that your product or service solves.
Product demonstrations are the nuts and bolts of how your product does what it does. Highlight the features that differentiate it from that of your competitors.
If you are selling software; use screen capture software to walk through it. If you are selling a product, use a 3D model and cut-aways of a customer using the product.
These videos are typically used to influence a prospect who is relatively far along in the sales cycle. In technology marketing these videos would be targeted at the technical approvers who need to understand how something works.
In consumer marketing these would be targeted at buyers of larger ticket items who are further along the sales cycle.