The diameter affects the “softness” of the edges (penumbra) of shadows cast by objects under the spotlight. When the diameter is set to 0”, the light is emitted from a single point and the penumbra is a sharp line. As you increase the diameter, light is emitted from an area (globe?) of the specified size and the penumbra softens.
If there are no objects to cast shadows from the spotlight, you will not notice a difference between settings.
EDIT:
In the attached example, two spotlights shine straight down on a bar positioned above a surface.
The left spotlight has a 0” diameter and the right spotlight has a 2” diameter.
The edges of the light from the spotlight are the same.
The bar shadow cast by the left-hand spotlight is sharp, provides strong contrast/definition, but may not be ideal for those looking for photorealism.
The bar shadow cast by the right-hand spotlight is softer/less defined, but may be considered more realistic.
When using this setting, consider/use the light source you are attempting to imitate. For example, a standard incandescent bulb is approximately 2.5” in diameter.
The spotlight should be used where only a generic, directional lighting is required. IES light sources will provide better results.
Cheers,
Andrew