Sales Promotion by Scott Neslin is a solid overview of current ("consensus") understanding of sales promotion and its effects. Purchasers have a set of variables which influence the purchasing decision. Promotion is the communication which targets the most heavily weighted variables (usually price, sometimes the overall "value").

Promotion is an excellent tool for effecting price discrimination, where people who are willing to pay more for a product are allowed to. In order to discriminate, there has to be an attribute which not all the population have. This requires a basic knowledge of the population's attributes and how they relate to other attributes.

It's also effective as a means of persuading new users to try a product (the cost of the trial is less). Since the cost is less, the overall risk of trying is lower, which tries to get around the consumer's bias: better the devil you know, than the devil you don't.

Time to go read more on effective price discrimation.