The ranking system within the site is just a measurement of your points, as James noted. I couldn't tell you the exact rankings and their thresholds, but the site tracks how many total points each user has, and your position within that list (from highest to lowest) determines the rank in your profile. It doesn't really mean anything, although I guess it's got to be a bit better to see "Diplomat" (top 1%) or "Mastermind" (top 10%) instead of "Political puppet" (the default) on your profile.
There's a second rating system that's quasi-integrated into the site, called the Ghost Rankings (named after TheGhostmaker, a great former user). This one gives you a ranking based upon your in-game performance rather than your points -- you 'wager' a portion of this ranking by default in each game you play (at the same fixed rate for each user), and your performance in the game (win, 2-way draw, whatever) determines how much of that ranking you get back. So basically, successful performances help, bad performances hurt, playing against good players (according to the ranking) helps, playing bad ones hurts. This ranking used to be used for invitational games and ego contests alike -- truly the greatest rewards of a Diplomacy career. (Bear in mind that the Ghost Rankings don't track you if you don't play; you get dropped off after a certain amount of inactivity. If you want to see yourself climb on this, keep playing!)
I would recommend ignoring the on-site ranking for certain. Invest your points and play games, you'll have fun and get better as you go. You'll eventually grow your points stockpile and be able to afford higher-pot games against more talented players. If you really care about where you stack up, use the Ghost Ratings to monitor it.