Homeopathy is a form of alternative medicine based on the principle of 'like cures like,' where substances that cause symptoms in a healthy person are used in diluted forms to treat similar symptoms in an ill person. Potency in homeopathy refers to the strength of these dilutions, indicated by numbers and letters on the label, such as 30X or 1M. The higher the number, the more diluted and potent the substance is considered to be, with different scales like X, C, and M indicating the level of dilution and shaking involved in its preparation.