Rotary encoders can be used similarly to potentiometers. The difference being that that an encoder has full rotation without limits (It just goes round and round). They output gray code so that you can tell how much and in which direction the encoder has been turned. They're great for navigating menu screens and things like that.

This encoder is especially cool because it has a common anode RGB LED built in, as well as a push-button. Look below for the clear knob that goes with this potentiometer.

Features:
Switch Travel: 0.5mm
Shaft Diameter: 6.0mm
Shaft Length: 18mm
Vertical Through-Hole Mount
24 Pulses per Rotation
Red/Green/Blue LED
Pushbutton

Tutorial: http://www.circuitsathome.com/mcu/programming/reading-rotary-encoder-on-arduino
Video: http://www.youtube.com/watch?v=HELBcKLL0Zs&feature=youtu.be&t=10s