The sandpaper letters are definitely one of my favorite Montessori materials. Dani has been working with them for quite a while and she really enjoys them. She has done many different activities with the letters. The pictures below were taken last year when she was learning initial sounds with sound objects and the sandpaper letters. 
She also learned how to trace the letters and write them in the sandbox.
Her favorite activity, up to this day, is to play the distance game, where we place the letter on the other side of the room and she has to walk and pick it up, after I tell her the letter sound. We pretend she owns a letter shop and I’m a costumer calling on the phone, inquiring if she has certain letters in stock. We spend an hour doing that, and she has a lot of fun.
There are many resources online with lessons and activities on the sandpaper letters. Montessori Monday has a very nice post with lots of links on this subject.
You don’t have to spend a lot of money on the sandpaper letters. In fact, you can make the letters yourself, if time is not an issue. No matter what, the sandpaper letters are worth either your time or your money.
I love this idea. What a great way of learning! Wish I had done this with my girls when they were in this stage.