Sometimes you already have content uploaded to a specific folder on your account or you want the content to be in a different folder than the default. In that case, you would specify the correct folder in "Username/directory/subdomain Name" field in the instructions above, instead of the one it suggests. If the folder does not exists, it will create it for you.
If the folder already exists, it may give you a warning that the username/directory/subdomain already exists, but in this case, you entered something that already exists on purpose. You can safely ignore this warning, since that was your intent to point the addon domain to a directory that already exists.