Colorforms oddly enough grew out of the progressive trend in the 1950's to create toys that were somehow beneficial to a kid's psychological well-being: these were (ostensibly) toys that helped kids learn and grow through play, stimulating their imaginations and creativity. To that end, the first Colorforms set was made up of little plastic shapes, of different colors. Kids could combine the shapes and colors to make their own pictures of whatever they liked.
Although stimulating and fun in its own way (the owner of this website had that set as a kid), the company figured out after a while that their toy was the perfect medium for kids who wanted to make up their own little stories when given a small backdrop and cast of imaginary characters - much like the storytellers who went around to different schools at that time, and used simple backdrops and cut-out characters made of felt to tell kids stories about American history or the Bible. The play inherent in such a setup was still perfectly imaginative and stimulating, just not as abstract.
Also, the medium was perfect for using licensed characters. A backdrop of an urban alleyway and some stick-on Batman characters, including a few badguys and some props, and a kid could spend hours making up his own adventures, changing and re-changing the scene as each chapter of the tale unfolded. It was ideal for dressing up a paper doll type figure (either part of the backdrop or cut separately to stand up on its own) without all of the hazards of using scissors and small paper tabs. Pieces from one Colorforms set could be used in another for elaborate adventures.
The 1970's was probably the hayday of Colorforms, with dozens of sets devoted to such subjects as Evel Knievel, Star Trek, or Holly Hobbie. But the brand survives to this day, and as millions of kids discover to their delight, despite the obvious enticements of modern video amusements, this simple little plastic and cardboard toy can still offer many hours of quiet imaginative fun.