The Blade Length (also called Blade Exposure) is how much blade is exposed at the bottom of the blade holder. For optimal cutting, you want this length to match the thickness of the material or be just a tiny bit longer.
When setting the blade length (Step 4 in the prior photo), hold the blade holder up next to the material before pressing the material to the mat, so that you can more accurately set the length to match the thickness of the material. For really thin materials, like vinyl and thin paper, just the very tip of the blade will be protruding from the bottom of the blade holder. In fact, you should just barely be able to feel it with your fingertip and not be able to see it very well, if at all. Having the blade fully extended will never result in better cutting. In fact, it can cause skewing, tearing of the material, damage to the blade, and damage to the mat.
A good way to test your blade length is to fold a piece of the material onto itself and then cut a line into the material by hand. Press firmly but not too hard, as more force will not determine if the blade is set to the right length. If the blade cannot cut through the material, you will need to extend the blade. If the blade cuts through the material and cuts into the next layer, you need to retract the blade. If the blade cuts through the material but does not cut into the layer below, you have the perfect length.