For every website it is important to be able to easily manage the content. Many sites can manage their content through Content Types, but there are other options as well. While Content Types can separate content into broad categories, Taxonomy terms can categorize another layer deeper. On an e-commerce site products can be categorized using Taxonomy Terms to separate products into categories such as hats, shirts, or pants. This allows the possiblity of creating pages to display all products, or just shirts, or shirts and pants.
To create new taxonomy terms go to Structure in the admin menu.