A beacon transmission includes a transmitter power field that indicates how strong the signal should be at a known distance.

As an example, when using iBeacon technology, the standard measurement is the signal level that an iPhone 5s (the latest model available when iOS 7 was released) will measure for a beacon at a distance of one meter. Beacons must be calibrated by measuring the signal level (known as Received Signal Strength Indicator or RSSI) at this reference distance and then configuring the beacon to transmit reference value. Values of RSSI are measured in dBm, and a typical one meter calibration value for a beacon transmitter will be -59 dBm. The actual calibration value for different beacons varies because each may have a transmitter and antenna that puts out a different amount of radio power. Some beacons, such as Radius Networks' RadBeacon products, have configurable transmitter output power.

Mobile devices can estimate the distance to the beacon by comparing the signal level they see with the reference signal level. Each time beacon advertisement packet is received, the bluetooth chipset provides a measurement of the beacon's signal level as RSSI. Because every single beacon transmission also includes the calibration value mentioned above, it is possible to compare the actual signal level with the expected signal level at one meter and then estimate the distance. For example, let's say the beacon advertisement packet was received with a signal level of -65 dBm and the transmitter power calibration value sent inside the transmission was -59 dBm. Because -65 dBm represents a weaker signal level than -59 dBm (greater negative numbers represent weaker signals) this means the beacon is probably more than one meter away.

You can plug these two numbers into a formula to calculate a distance estimate.