Aromatherapy is the concept of using the aroma from a plant or product, usually given off via diffusion, for its pharmacological activity. Aromatherapy, at least relative to many other fields, tends to have less evidence supporting its claims and is mostly based in traditional medicine and anecdotes (and as such, placebo effect is certainly problematic when it comes to aromatherapy).
Research into aromatherapy is relatively young (and generally has less robust studies conducted due to difficulties in blinding participants) and relies on the assumption that volatile compounds in the essential oils are diffused into the air and then enter the nasal cavity of lungs where they can then act upon the body. Compounds that are traditionally smoked (such as marijuana) are not generally referred to as aromatherapy.
Methods of aromatherapy include burning incense (which may not be preferred, due in part to a possibility of altering the molecular structure with combustion) or diffusing without combustion either with a direct air unit, an ultrasonic diffuser, or the essential oil can be used without any machinery.