The services are programs that accept input from the user selection, process it, and optionally put the result back in the clipboard.
The concept is similar to a GUI equivalent of a Unix pipe, allowing arbitrary data to be processed and passed between programs.
Their simple, one-purpose nature and the fact that they don't require a GUI to be designed makes writing standalone services popular beginner's macOS programming projects.
Most users only will ever use a small subset of the possible options, therefore cutting down and customizing the menu makes it both faster and more pleasant to use.
Even in macOS, there is an alternative system called the context menu handler, which is carried over from classic Mac OS.