Search engines recommend your URL's to be no more than 67 characters in length, so you wouldn't want to get carried away with a large tree of categories.
Sitemaps provide a weighting to the search engines with regard to the importance/priority you place on a page. Typically the further down the tree, the lower the priority. If all your website's pages were at the same hierarchical level and shared the same priority then the search engines won't know which pages to prioritize showing in search listings, and since they will only show one or a couple in order to ensure a varied selection of search results, the only way to choose which pages you think are important to show listings for is to set the priorities.
Without knowing too much about your website, something along these lines could be appropriate, with priorities specified in square brackets (obviously with names that fit your products and categories):
- [1.0] / (home page)
- [0.9] /contact-us
- [0.9] /about-us
- [0.8] /search
- [0.8] /products
- [0.7] /products/category-one
- [0.7] /products/category-two
- [0.7] /products/category-three
- [0.7] /products/category-four
- [0.7] /products/category-five
- [0.6] /products/category-one/product-twenty
- [0.6] /products/category-two/product-twenty
- [0.6] /products/category-three/product-twenty
- [0.6] /products/category-four/product-twenty
- [0.6] /products/category-five/product-twenty
- [0.6] /products/category-five/subcategory
- [0.5] /products/category-five/subcategory/product-ten
- [0.2] /legal
- [0.1] /legal/terms-of-business
- [0.1] /legal/privacy-policy
- [0.1] /legal/website-terms-of-use
Breaking your products up into smaller groups of 10 or 20 can work well provided the splitting is logical to the end-users. For example, if you sold home furniture then you could split into categories by the room of the house, but if you sold wallpaper you might need to split into categories by colour or finish or price bracket etc.
I don't think any of this would have much affect on your website's ranking position however it would influence which pages are chosen to be displayed.
I have found that having a general product page can prove beneficial provided you have value-adding content for it. However, if it's really just a placeholder then you might prefer to setup a redirect so that the URL can exist (people sometimes will edit the URL to go up a level) but so that it points people to the first category of products.
When thinking about navigation for websites, I tend to think of the 3-click rule. If I came to your website looking for a particular page or product, could I find it within 3 logical clicks? If so then I'm happy as an end-user. From experience I've found that if the navigation has been thought out primarily for the benefit of end-users then search engines tend to receive it well too, provided all the other normal friendly URL guidance has been followed (e.g. hyphens not underscores).