Both in and out of universe, one of the final phases of the hero’s journey, before the hero can return with the magic elixir to save their people, they have to pass through the deepest darkness and be willing to sacrifice themselves in order to save themselves. There’s a common mythology among the cultures of the world that there must be pain and sacrifice before redemption is possible. That’s what Tyler is talking about in that scene.
It’s also a concept in some areas of life. Addicts might talk about “having to hit rock bottom” before they are able to understand and accept that they are addicts and need to get sober. Sometimes military training is described as breaking the soldiers down mentally and physically so they can be built up again.
The idea can be boiled down to: you have to kill or destroy your old self before you can become your new self. Note that is exactly what happens at the end of Fight Club.