Chapter 12 of John Palmer's "How to Brew" gives a pretty good break down of efficiency. In a nutshell, each source of fermentables (grains, adjuncts, extracts, etc.) have a potential amount of points per pound per gallon that they are capable of. There are a number of charts, software and apps out there that give you a good idea what to expect from each.
As an example, one of the sources I use says that US 2-row barley has an extract potential of 1.036. That means that at 100% efficiency, one pound of 2-row per gallon of water will give you a gravity of 1.036, or 36 ppg of potential extract.
If you mash that same 1 pound in one gallon of water in your system (I know the amounts are unrealistic). and only get an OG of 1.025, then your efficiency was around 70%.
So your efficiency is essentially the percentage of extract you produced based on what the potential extract of your ingredients is. Once you know what sort of efficiency you can get out of your system, it helps you adjust recipes you get from other sources, friends, the internet, etc. to match the potential of your system. It also makes it a lot easier to custom build recipes to your specific setup.
It took me about 4 or 5 batches to settle on an efficiency of about 67% with my process and equipment. I know a lot of people will gasp at that and give me all manner of suggestions to increase my efficiency. But, since at this point in my life I have a little more money than time, it makes more sense for me to add a few ounces to a half pound of grain here or there and adjust a recipe for my efficiency. Maybe in a few years when the kids are out of the house, I will work on fine tuning my gear and process.
A lot of recipe sources will give their extract efficiencies along with the recipes. I know BYO calculates most of their recipes at 65%, so I can use recipes from there almost as is.
