iCloud and disk storage space

My computer keeps asking me to manage my disk storage space, so I delete old downloads and apps and clear space in my documents. Then I look at my storage breakdown and the largest percentage of space is taken up by my iCloud. I don't understand, I thought the point of storing things in iCloud was to keep them off my physical laptop. I bought extra space in iCloud a while ago so I have plenty of space within my cloud. What am I not understanding about iCloud? What should I do to reduce the iCloud storage space on my laptop?