I found these coloured small wooden blocks (about a centimeter) from a dollar store for Under 2$
*Not intended for young children as they could be a choking hazard.
The quality was not superb but I tossed out the rough ones. Using a sharpie I wrote the upper case and lower case letters on these ones- I was hoping it would encourage exposure to both lower and upper case letters (but my kids are not quiet there yet.)
Skills learned: Letters, Upper and lower case letters, matching, colours, stacking, word creation (which turns into letter sounds as well), and whatever else your kids come up with!
(Mine used the blocks to make shapes and towers as well as words. My younger helped to sort the colours while my older one worked on which colour has more than or less than.)