This customization dialog seemed inoperable on macOS 10.12.1 on my 2016 MacBook Pro; dragging things seemingly had no effect: I am not used to dragging off the screen.
Finally it hit me: one has to drag the icons down towards the touchbar, off the screen (just as the instructions say, doh!); doing so makes the dragged item light up on the touchbar. Something new and for me at least, 10 minutes of confusion.
Similarly, to remove an item from the touchbar, move the pointer below the screen; an item on the touchbar itself will light up—drag that item up and out of the touchbar.
What is frustrating here is that I need at most one or two of these icons (I use command key shortcuts by preference), and the ones I do want are missing (function keys) and app-specific items.
Tip: configured however wayt, holding down thekey at bottom left of keyboard toggles the touchbar display to a set of alternate items.