The meaning of overselling is to sell more than you can deliver. In web hosting, this is most clearly seen in budget hosting plans, where you are offered the same amount of data transfer and disk space that you will get in an entry level dedicated server for less than $10/month. That is, until you actually use a significant part of your quotas and are reminded by your webhost that you are violating some clause in their terms of service. Typical examples are limitations on the type of content on your website (images/video) or that you are slowing down the whole server because of heavy cpu usage.

When these resources (data transfer and disk space) are relatively cheap and most websites don't really need all that much, some overselling is reasonable and everyone does it to some degree. If the web hosting provider loses a little money on 1 in 100 customers, it's nothing they can't afford. But too much of anything is no good.