One of the most common Google Analytics questions I get is to explain the difference between bounce rate and exit rate. Here's what I hope is a simple explanation.
Bounce rate is the percentage of people who landed on a page and immediately left. Bounces are always one page sessions.
High bounce rates are often bad, but it's really a matter of context. Some queries may inherently generate high bounce rates. Specific informational queries (e.g. - What are the flavors of Otter Pops?) might yield high bounce rates. If the page fulfills the query intent, there may be no further reason for the user to engage. It doesn't mean it was a bad experience, it just means they got exactly what they wanted and nothing more. (I was always partial to Louie-Bloo Raspberry or Alexander the Grape.)
A high bounce rate on a home page is usually a sign that something is wrong. But again, make sure you take a close look at the sources and keywords that are driving traffic. You might have a very low bounce rate for some keywords and very high for others. Maybe you're getting a lot of StumbleUpon traffic which, by its very nature, has a high bounce rate.
Bounce rate is important but always make sure you look beyond the actual number.
Exit rate is the percentage of people who left your site from that page. Exits may have viewed more than one page in a session. That means they may not have landed on that page, but simply found their way to it through site navigation.
Like bounce rates, high exit rates can often reveal problem areas on your site. But the same type of caution needs to be applied. If you have a paginated article - say four pages - and the exit rate on the last page is high, is that really a bad thing? They've reached the end of the article. It may be natural for them to leave at that point.
Of course, you'll want to try different UX treatments for surfacing related articles or encourage social interactions to reduce the exit rate, but that it was high to begin with shouldn't create panic.
Exit rate should be looked at within a relative navigation context. Pages that should naturally create further clicks, but don't, are ripe for optimization.
(Extra points if you get my visual 'bounce' reference.)
But There's More! I've developed the Ultimate Guide to Bounce Rate to answer all of your bounce rate questions. This straight-forward guide features Ron Paul, The Rolling Stones and Nyan Cat. You're sure to learn something and be entertained at the same time.