Here you will have to select the background color for the image i.e. Color 2 here. For e.g. if your background color is white, you will need to set ‘color 2 ’ to a similar shade of white here.

This is a JPEG image in Illustrator, the background is still white even with transparency enabled in Illustrator. This is the image where the background is removed using one of the methods ...

I occasionally need to convert the background color of a particular image to be transparent so that the image looks better on medium with backgrounds of colors other than the image's original ...