It's a general assessment of how easy it is for a character to win. How much damage they can deal off their fastest attacks, is usually the most important part... it's a good measure of how much advantage you get when your opponent makes a mistake. As for how the entire list is decided on for specific games... well, it's different for each game. Smash usually bases it's tiers on tournaments results, which is why the tiers can change a lot as players learn new strategies. SC emphasizes strong lows, but I think that was partially due to the glitchy crouch cancel stuff in SC3? VF tiers are usually based on analysis of the frame data by experts, so the tier list is consistent, in the sense that people don't bother updating it... but it often doesn't actually relate very well to trends in actual play.
Risk/reward ratio is one of the deciding factors usually. Thats why predominantly safe characters with good damage potential usually are perceived high-tier in VF (arcadia magazine) I think.
Usually strong lows have been important since they actually give opponents a reason to duck, which opens up the mid mixups etc. That sounds kinda basic, but not every character has had a good collection of tools so the really good lows become exceptional. Yun for example has never had a good low game, so his mindgame options have always been limited keeping him low tier.