The temperature differential is basically how many degrees over your desired temperature the controller will allow before it turns on.
For example, if you set the controller to 68 with a 2 degree differential, it will let the temperature get to 70 before triggering the refrigerator to turn on and start cooling.
The temperatures you use will vary according to the yeast you use. I use a lot of the White Labs 001 (California Ale). I like to ferment it at 67 degrees to get a very clean character. I set my temperature to 67 with a 1 degree differential. I also tape the controller to the side of the bucket (or carboy) so that it's reading the temperature of the liquid (or very close to it) not the temperature of the air. That allows a more accurate temperature reading. The controller also won't come on as often as if you were reading the air temp.
When using both the heating and cooling, you need to find a middle ground so that you're not constantly heating or cooling the liquid, if you can. For CA Ale yeast, I'd set it to 67 for the cooling and 65 for the heating. If it gets above 65, the fridge will come on. If it gets below 65, whatever you are using as a heater will come on.