What is the difference between iCloud storage and backup?

If you are using iCloud to store contacts, then those come back when you sign in to iCloud on the new iPhone. If you are using a different email accounts such as Hotmail, Gmail etc... then those come back when you sing in to the account that holds them. The Backup does not store contacts.

Notes, again, if storing them in iCloud directly will not be in the backup, and can be retrieved by logging in to the iCloud account and turning on the Notes option there.

Apps are not stored in iCloud or in the backup. You would need to redownload them from the App Store. Restoring a backup will simply automatically re-download any apps that were installed on the device when the backup was made from the App Store, not iCloud.

WhatsApp data is stored in iCloud, but not the backup if you have the iCloud option turned on for it.

link-> About backups for iPhone, iPad, and iPod touch - Apple Support

iCloud backups

With a Wi-Fi network connection, you can make a backup of your device using iCloud. You don’t need to plug your device into a computer or even be at home to back up with iCloud. 

iCloud backups include nearly all data and settings stored on your device.

 iCloud backups don't include:

• Data that's already stored in iCloud, like Contacts, Calendars, Notes, iCloud Photos, iMessages, Voice Memos, text (SMS) and multimedia (MMS) messages, and Health data
• Data stored in other cloud services, like Gmail and Exchange mail
• Apple Mail data
• Apple Pay information and settings
• Face ID or Touch ID settings
• iCloud Music Library and App Store content (If it's still available in the iTunes, App, or Apple Books store, you can tap to re-download your already purchased content.)

Learn how to make an iCloud backup or how to manage iCloud storage and delete backups that you no longer need.

iCloud backup, storages all your iPhone information, such as usernames and passwords, settings, app layout... just to name a few.

iCloud Storage is a storage system, which is in the cloud and you can basically save any file or document on it and access it from the web, a Mac or Windows compatible computer.

*for windows, please make sure device is eligible to download iCloud storage app from the windows store.

Correct. Backups and Documents are 2 different things that take up iCloud Storage. Backups are stored in closed packages and labeled as a backup.

When you delete the backup, it frees up the iCloud storage space it was using.

The Docs section is not related to backups so would not be removed.

If you want to remove the docs section, open the Files App, and see what files and folders you have there using up iCloud storage space.

More specifically, iCloud Backup stores a point-in-time backup of your device (e.g. iPhone) so that you can restore your phone should something happen. Kind of like write once, hopefully read never (since you never need to restore your device)

iCloud Storage is more document-based, where you can store documents and edit them directly, almost as if they were stored on your machine (technically the data is cached and synched to iCloud, but the concept remains sound).

So, two sides of the same coin - storing data in iCloud. Mostly a matter of access pattern differences.

iCloud Backup uses iCloud Storage to store all the contents of your device in iCloud in a backup.

iCloud Storage is like the hard drive where the backup is stored.