Knowledgebase
How to configure the layered navigation settings in Magento
Layered navigation makes the products in your store more easily accessible by offering customers different values (e.g. price, color, etc.) for filtering products.
There are a few places in the admin panel of your Magento that have layered navigation related options. To configure the global layered navigation options (those that apply to the whole store), go to System menu>Configuration>Catalog>Layered Navigation. One is for displaying the product count; it determines whether the number of products that match the particular value should be shown in the layered navigation block. By default, it's set to Yes. The other is for calculating the price step and it's set to do it automatically. If you you want to, you can manually specify the price steps.
The categories that you create also have options connected with layered navigation. Go to Catalog>Manage Categories, click on the category that you want to edit and then on the Display Settings tab. There is a setting Is Anchor that is set to No by default. If you want the values of product attributes to be used with layered navigation, anchor the category by selecting Yes from the Is Anchor drop-down menu. The attributes also have to be filterable, but that can be changed from the settings of the particular attribute. The other category option connected with layered navigation is Layered Navigation Price Step. You can use it to set a price step for that category if you want it to be different than the one specified by the global price step option.
As we mentioned, attributes have to be filterable if you want the values of the particular attribute to be displayed by the layered navigation menu. To edit or create attributes go to Catalog>Attributes>Manage Attributes. The Catalog Input Type of the attribute has to be Dropdown, Multiple Select or Price. Otherwise, the attribute can't be used with layered navigation. If the input type is one of these three types, you'll be able to set the option Use in Layered Navigation that's on the same page to Filterable.
For more details and screenshots read the tutorial on layered navigation in Magento.