Choreography is an important part of most of the types of dancing I do. It matters some in couples dancing (where figures can have a fairly precise path that must be followed if they're going to look and feel good), and it matters significantly in set dancing. In fact, one could easily argue that choreography is the whole POINT of set dancing --while you could just move directly to where the caller next wants you, that strips the entertainment of what makes it great. The point isn't to mill around on a dance floor, the point is to create patterns, follow paths, flow gracefully thoughout your set.
(Some of the prettiest patterns I've seen in set dancing result in very little net movement when all is said and done --Relay the Ducey, for all its winds and turns, is the same net change as "circulate twice".)
That being said, being good at choreography does not necessarily make you good at dancing, and vice versa. I'm living proof of that latter rule --I consider myself to be a fairly competent dancer (and routinely receive outside confirmation of that fact) but if we're being perfectly honest, I'm pretty lousy at a lot of choreography --especially squares. While I've technically learned all of A1 and A2, (and at least a dozen calls from C1!) were I quizzed on the actual definitions, I'd be at a complete loss. Yet I'm able to keep up on an A2 dance floor with relative ease, and have even been known to participate in dances at the C1 level --no gemini, no other square to match, just me dancing, and well enough to keep the square from breaking down.
So where's the trick? It's a lot of little things, I think. Practise, and lots of experience at set dancing is a big one. I can learn new kinds of set dances easier, because I understand the rules and can often recognize the gist of a figure based on similar things I've done. Being flexible is huge, especially about things like what direction you're supposed to be facing (quick spin!) and who's hands you're supposed to be grabbing. There are hints to be picked up from a good or familiar caller, what direction the flow of the dance is moving, whether they have a tendency to re-use certain sequences, that sort of thing. For squares, being aware of your opposite and being able to align yourself with them, quickly and effectively. (unless something interesting happens, you and they should always be symmetric, with respect to a 180degree rotation).
Most importantly, for any dance, the trick is just being able to communicate, and having a set or partner who you trust to lead you true. Be it words, hands, pushes, pulls, points... people will give you signals of where you need to be, and learning how to follow those signals, respond quickly and efficiently, will boost your ability to dance in a noticeable way. There are few things as frustrating to me as a dancer who will not listen when they are told what they need to do, and insist on dithering in the middle of a set, or doing things their own (wrong!) way despite the admonitions of the rest of the group. We all mess up sometimes, but that's why we dance together --so different people can help each other through the calls we find difficult.
Interestingly, the types of communication that help a set guide its individuals to the correct spot are also the types of communication that guide a follow through a convoluted couples dance. Because here's the thing --it's all well and good if the leader knows a complicated bit of choreography, but if they can't communicate what's going on to their follow, then the dance will fall to pieces (just like if a square of seven perfect choreographists have no ability to steer through their new student eighth.) I've had the misfortune to meet leaders who think of themselves as very good (because they know the choreography) but are actually absolutely terrible to dance with. I assure you, I am an excellent follower (and so modest), so it shocked me to find myself unable to keep up with someone who had looked so very good just a few dances before.
Here's the point of this (slightly rambly) entry: Learn the choreography. Learn the calls. Learn the figures. Practise them, and get good at them, and break them down so you can do them cold. But when it comes right down to dancing them, make sure you're doing more for the dance than just following a precise set of movements --because unless you're dancing alone, there's a lot more than choreography to being good at dancing.