Work on the quality of your music. Then, work on it some more. If you're not sure if your music is brilliant, then it probably isn't. Work on your songwriting craft, polish your live show and make sure that your recordings are top notch. A hastily assembled three-song demo isn't going to impress anyone at a record company; you need high-quality, commercially viable songs that are professionally recorded and packaged.
Have your music professionally mastered. Mastering your CD will give it the polish and sheen that it needs to compete with commercially successful music. They are, after all, your competition, and rest assured that other worthwhile submissions to record companies will be professionally mastered, so make sure that the sound quality of your CD is competitive.
Go out on the road and develop a following. It's unlikely that a record company will take a chance on an unproven live act, but if you can show that you're already a viable concert draw and that you can routinely sell product on a regional level, then a record company will be more interested in taking a closer look at what you have to offer.
Craft a brief bio, making it clear who you are and what you've done, outlining any noteworthy career achievements along the way. Feel free to name-drop if you've worked with any any notable names in the business. It won't get you a record deal, but it might make the difference between having your CD listened to and having it unceremoniously tossed into the office trash can.
Assemble a one-sheet for your CD, a one-page information sheet that accompanies your CD and bio. Include the song titles, running times and a little information about two or three standout songs and their instrumentation and genre. If you have a couple of testimonials from any notable person in the industry, like a producer, reviewer, or radio personality, add them too.
Research and target a few record companies in your genre. This is important; if you're a bluegrass band, it doesn't matter how brilliant you are if you're submitting to a heavy metal label. Don't waste time sending out blanket emails to every label you find. When you see artists who are in a similar vein to you, find out who they're signed to and visit the label's website to search for their submission guidelines. Follow these to the letter or your CD and bio will almost certainly end up in the trash. If there are no submission guidelines on the site, use the contact email on the site and write a brief, polite email explaining who you are and asking if you can send a sample of your music. If you don't hear back, you could send a brief follow-up, but after that, move on. If you do happen to hear back, you'll then have a contact name at the company, and you can then address your package directly to him. This is no guarantee of any further response, of course, but there's more chance of it reaching someone who may at least give it a listen.