Friendly usually refers a Player, Pet, NPC, Town, or City of the same faction as your character (Alliance or Horde) as opposed to being Neutral or of the other Hostile faction. Additional notes:
When you click on friendly beasts or NPCs, their name and highlight will be green.
As of patch 2.3 this reputation level gives a 5% discount.
Certain factions in Northrend sell tabards for players who become friendly. These allow the player to gain reputation for that faction while running non-raid instances at level 80.