Think a large office space or industrial application with several hundred (or thousands) of hosts connected to the network. Some of them need to be isolated from the internet and/or rest of the network, some need only access to the internet, some need internet and local services and so on.

With that kind of setup you could just run separate cables and unmanaged switches for every different type of network you have and have the router manage where each of those can talk to. However, that would be pretty difficult to change or expand while being pretty expensive as you need a ton of hardware and cabling to do it. Instead you use VLANs which kinda-sorta split your single hardware switch into multiple virtual ones and you can still manage their access from a single router.

If you replace all the switches with routers they’re quite a bit more expensive and there’s not too many routers with 24 or 48 ports around. And additonally router configuration is more complex than just telling the switch that ‘ports 1-10 are on vlan id 5 and ports 15-20 are on id 8’. With dozens of switches that adds up pretty fast. And while you could run most routers as a switch you’ll just waste your money with that.

VLANs can be pretty useful in home environment too, but they’re mostly used in bigger environments.