Knockback is basically how far you get hit when hit by an attack. The higher your percentage, the further you go. The lower your percentage, you do not go far.
It is believed that lighter characters fly further than heavier characters hit by the same move at the same percent.
When you are metal, using the Metal Box your Knockback is alot lower. When you are small having collected a Poison Mushroom then your Knockback is increased, when you are big, by collecting a Super Mushroom your knockback is decreased.