Launch parties aren't promotional tools - they're, well, parties! Just a day for the author and their friends, family, and fans to celebrate the release of a new book.
I didn't have a real-world party for my first novel because all of the people I would have invited live all over the country, so I had mine online: http://freezingpointlaunchparty.com/
For my next book, I'm considering a real-world party at an independent bookstore in an area where I used to live. I think I can draw perhaps 50 people to the event. However again, just to emphasize, it's a PARTY, so I don't expect to sell enough books to make it profitable - it will just be a thank you to the people who've supported me on my path to publication. Refreshments, door prizes - that sort of thing, with the keyword being "fun."
Karen is right -- a launch party is just a party. You pick a place, invite friends, family and whomever, provide refreshments, and everybody claps you on the back and offers congratulations. You won't sell any books out of it, but you'll have a good time. And why not? It's a party all about you!
I think an actual launch party is usually put on by the publisher--they invite critics and big-name authors and other industry people (execs from Amazon? Who knows?) hoping to generate some additional buzz (pun intended) for the book. So it's launched--a bit like an ocean liner with a magnum of champagne smashed against its bow. Actual launch parties are becoming almost as rare as ocean liner christenings, evidently--unless it's a "big" book, publishers don't want to spend the money. A book party is just a party you throw for your friends to celebrate your book. Assuming that's what you're doing, here are the dos and don'ts as I understand them:
Do: get somebody else to host it, if possible.
Don't: get drunk and piss in their fireplace.
Launch parties can be very pleasant, but ninety-nine times out of a hundred, they're virtually useless for generating sales or buzz or anything else. That's why publishers have stopped doing them. We'd rather use the money that would be spent on the party for something that might ACTUALLY generate sales or buzz for the book. I've never met an author yet who disagreed.
Jon -- It's going to vary widely depending on what the book is. But among the possible things: regional promotions, targeted online advertising, extra ARCs for accounts, easelbacks for accounts, limited co-op...that kind of thing.