This isn't something that I've thought too much about in the past, because the majority of my writing takes place in the real world. The book I'm currently querying takes place in Providence, Rhode Island. I lived there for four years (college) and still visit frequently, so it is a very familiar place to me. In my story, I used a combination of real places and fictionalized businesses.
My current WIP is a bit different. It takes place in the 'Underworld', which is a mishmash of various mythologies, religions and beliefs about the afterlife/what happens after death. I've approached it as a geographical place that exists on a different plane from our own and twisted some of the traditional beliefs. It is an alternate life from the one lived on earth.
Purgatory, for example, is the 'Hub' of the Underworld. It is a crossroads, the place where souls first arrive. Death, the deity responsible to bringing souls to the afterlife, has his headquarters there. There is not a single Grim Reaper, it is a profession and there are many of them. All reapers settle in Purgatory.
Heaven and Hell are the other 'main' locations, and they contain various kingdoms, cities, landmarks-- like Hades or Valhalla. I'd also like to incorporate mythological creatures and deities as characters. Charon, for example, ferries two of the characters down the river Lethe in exchange for a share in the goods they're smuggling in from earth.
Putting it all together is a daunting task, to say the least. I want to make it my own, and mold the mythologies to fit my story, but I also want readers to pull something familiar from it. I'm working on something that really interests me--I've always been fascinated by mythology, folk tales, and everything in between. At the same time, it has really taken me out of my comfort zone and writing has been slow. It will be interesting to see where this leads...