Products can be related to each other in three ways: Up-Sells, Cross-Sells or by having the same tags or categories.
Up-sells are recommended products instead of the current product that you are viewing. For example, products that are of better quality or more expensive. Depending on your site’s template these products will display on the single product page underneath the product’s description.
Cross-sells are products promoted in the cart based on the current product. Depending on your site’s template they will display on the cart page underneath the cart products table with a thumbnail image.
Related products is a section on some templates that pulls other products from your store that share the same tags or categories as the current product. These products can not be specified in the admin, but can be influenced by grouping similar products in the same category or by using the same tags.