It's a way of switching what you use as a root file system. For example, you could create a directory called /home/cheese and use that as the root file system. The caveat is that you'll need a fair few files for the OS to keep on running - such as libraries, bin files and so forth.
Generally chroot is used for daemons to improve security in case the daemon is compromised - such as an ftp daemon. This way, if the hacker can use a flaw to get access to the OS, they're stuck in the chrooted filesystem, and can't access 'real' files and directories.

Another use of chroot would be to rescue a system that won't boot by booting from a rescue CD and then chrooting to the server's filesystem so that you can fix the problems.

Outside of these scenarios, there's not that much practical use for chroot.