Iphone storage

Your backup that you are trying to make is stored in iCloud, and not locally on your iPhone. So if you don't have enough space in iCloud, that's why you're getting this message.

You can read about the difference between iCloud and iPhone Storage here:

What's the difference between device storage and iCloud storage? - Apple Support

You can read how to make an iCloud Backup here:

How to back up your iPhone, iPad, and iPod touch - Apple Support

If you want to upgrade your iCloud Storage, start here:

Upgrade to iCloud+ - Apple Support

It seems your iCloud storage is too small to back up your data.

To back up, delete some space by deleting photos, videos and apps stored on your device, or upgrade iCloud storage and try to back up to iCloud.