This is another cross-post with mywife. We are both talking about the same subject from different angles. You can see her post over here.
Cultural would building is my favorite part of world building. It is also the most difficult part of world building. It is also a necessity to make a good story great. Without culture, a fictional society begins to crumble and look poorly constructed and unbelievable. On the other hand, like all world building, too much cultural development can detract from a story. The important thing to do with cultural development in your world is to build enough to make it look interesting and not go any further beyond that.
There are two factors that lead to developing culture. The geography and the history of the region that you are developing. It is important to reflect upon both when you get into developing the culture. I personally find that the geographic aspect of cultural building is easier to do where as historical impact on culture is harder. Geography generally doesn't change. History, on the other hand is fluid and subject to change and development over time, but also subject to rewrites by the author. If you build a piece of culture around a war and later remove the war from the history, the culture is going to change.
Geographic Cultural Development
To design culture based on geography, you have to take a close look at the geography in question. Look at the aspects of the geography that make it interesting and unique. Is it extremely cold? Is there some sort unique geological feature. Cultures tend to develop based around the unique geographical features. A village on a large river is going to be influenced by that river. Dry, arid regions will have cultures that cherish the rare summer rainstorms and may even develop a rain festival.
Historical Cultural Development
This is where the flexibility comes in. In order for you to develop this culture, you need to look at the significant historical events for the region. Has the region been plagued by repeated wars? This might develop a society of hardened, stern people. A society that had a deadly plague sweep through their land might develop a supernatural belief based on a precipitating event.
Putting the Two Together
The best cultures are going to use a mix of the two together. It's really easy. Just look at how a historical event was shaped by that primary geological feature. Suddenly, you have new cultures develop. The arid village might have had the plague start at the time of major storm, prompting the society to develop a connection between rain and death.
In my epic fantasy, I have a race of aquatic creatures. For them, the chief geographic feature is the fact that the cities are on the bottom of the ocean. This has a couple of immediate effects on the culture. I'm not going to explain all of them, only one of them. Being that the society exists underwater, the only weapons that would work effectively are jabbing weapons. Any other type would have too much resistance to movement in the water. This leaves spears and tridents as potential weapons. Historically, there is an event, I won't describe it in this post, that forced the people of this world to fight. Single spears didn't work. Only tridents were effective. Additionally, fighting alone or in pairs was not enough to deal with this threat. Success only came when there were three, or more involved. As a result of this event, the number three developed as being significant in this culture. Almost all aspects of the society develop around the number three. This covers everything from three-prong tipped tridents to guard formations in groups of three, to floors in the coral towers housing three families.