The harder it is to find what you are looking for when shopping on a website, the less likely you will purchase anything. Creating product categories that make sense is essential with an e-commerce website. It is good to put a single product under multiple categories. For instance, if your product is a red, 100% cotton, short-sleeved t-shirt, then your main category would be "T-Shirts," and then possible subcategories that this single product could belong to would be "Red, 100% Cotton, Short Sleeved." That way when a person is shopping for a t-shirt, they can find the one they are looking for in several different ways.
IMPORTANT: Be careful not to use too many subcategories unnecessarily. Too many clicks to find the product you are looking for reduces the odds of someone buying.
Category Worksheet (PDF)
Category Worksheet (MS Word)