Compressing an image is significantly different than compressing raw binary data. Of course, general purpose compression programs can be used to compress images, but the result is less than optimal. This is because images have certain statistical properties which can be exploited by encoders specifically designed for them. Also, some of the finer details in the image can be sacrificed for the sake of saving a little more bandwidth or storage space. This also means that lossy compression techniques can be used in this area.
Lossless compression involves with compressing data which, when decompressed, will be an exact replica of the original data. This is the case when binary data such as executables, documents etc. are compressed. They need to be exactly reproduced when decompressed. On the other hand, images (and music too) need not be reproduced 'exactly'. An approximation of the original image is enough for most purposes, as long as the error between the original and the compressed image is tolerable.
Error Metrics
Two of the error metrics used to compare the various image compression techniques are the Mean Square Error (MSE) and the Peak Signal to Noise Ratio (PSNR). The MSE is the cumulative squared error between the compressed and the original image, whereas PSNR is a measure of the peak error. The mathematical formulas for the two are
MSE = 
PSNR = 20 * log10 (255 / sqrt(MSE))
where I(x,y) is the original image, I'(x,y) is the approximated version (which is actually the decompressed image) and M,N are the dimensions of the images. A lower value for MSE means lesser error, and as seen from the inverse relation between the MSE and PSNR, this translates to a high value of PSNR. Logically, a higher value of PSNR is good because it means that the ratio of Signal to Noise is higher. Here, the 'signal' is the original image, and the 'noise' is the error in reconstruction. So, if you find a compression scheme having a lower MSE (and a high PSNR), you can recognize that it is a better one.
