The Label construct in ISN (previously referred to as a category) is essentially a tool you can use to tag certain groups of contacts together. Each type of contact in the ISN can have a label applied to it:
What are labels used for?
Primarily used in Mass Emails, Labels are assigned to a given contact type and can then be selected as a filter for who to send a mass email too (or who to opt out of a particular mass email).
Who can labels be assigned to?
Labels are divided by contact type across clients, agents, agencies, and custom contact types.
For information on how to apply labels, click here.