Just the lowest rate for a specific hotel. Can't track specific room types (would love something that does!). It's not associated with a purchase. You can use the tool even if you don't make a purchase. I've even used it when I booked directly with the hotel but want to know when rates drop so that I can rebook. It used to come up when you click into a hotel after a search with date and location.
I like the hotels.com tool over the others (Kayak and Hotels Combined) because the hotels.com watch seems to be able to track "member only" or what hotels.com calls secret rates.