I started this as a reply to increpare's question: How much do you plan on characterizing each of the playing areas?
I thought it would make a good dev blog post.
For the purposes of this blog post, I should explain what I mean by "area".
Each "area" is a 50x50 block that you can think of as being closely analogous to a "screen" in non-scrolling games. That is, it normally fits within a greater geography but creates a very concrete sense of location. When the player leaves one area, they hit an edge and the next one loads. It's a somewhat abrupt and very deliberate transition. As a result, the player's sense of location in the game world is discrete: she knows she is on the area (screen) with the waterfall, not just "near to" the waterfall.
In that sense, each area is mainly characterized by it's shape, and it's contents: where are the exits, walls, and what buildings or set pieces are inside of it. I lay trees/rocks out in certain patterns or try to create distinctive points of interest on each area. By the same token, other areas are more anonymous in feel (e.g., somewhere in a forested area); they seem to just be a "forest square". Even so, landmarks such as bends in a river or particularly placed trees are helpful.
Beyond this the game is broken down into a greater geography. There are "real world" and a "alternate reality" planes which have slightly different color sets and terrain types, as well as completely different trees/rocks/walls/etc. This creates a nice division between the two.
Within each plane, I try to create a sense of location by how I lay out objects and how areas flow into each other. So for instance, certain flowers may be very prominent on the southwest corner of a map, across several areas, but not at all existent on the southeast corner. Other, larger "places" help to define the areas such as a castle, graveyard, or town.
Certain elements also flow between areas; so farms have fields that cross across boundaries and walls which pass through several areas. We have to follow the walls (usually by walking on a path) to a nearby gate to get through (although in many cases there are crumbling sections which not only add interest but prevent you from having to walk all the way around).
Lastly, or rather, firstly, I start off thinking of setting. The first thing I usually want to create is the setting, and that means mapping. So I draw maps on paper, changing and reorganizing, until they seem to have interest and look natural.
All this, without respect for the gameplay they will later have to support. For the most part, the entire game world was created before I had a good idea as to the specifics of locations, or other functional elements (e.g., crossing a bridge or getting through a certain cave to reach a more advanced area). I think this approach creates a better sense of place, so that you feel the game world is quite logically organized.
I also think this is a more authorly way to work. Do novelists start off by thinking of a story and then construct a setting to fit around it? Of course not. A setting inspires a story and if it's not based on a real place or time on planet earth, then typically requires a lot of imagining on the author's part.
Of course, you make modifications to your setting to fit your story, once you have it in place and realize what you need.
The purpose of this kind of organization is to allow the player to orient themselves within a believable world. We give them enough landmarks and subdivide the world into discrete blogs to give them a very good sense of where they are at all times. At the same time, we have a greater sense of geography that we constructed to be interesting in the first place, before we started to think about gameplay and story. What we end up with is a world that both feels natural and is easy to understand: and hopefully somewhere fun to be!