Definition:
Website’s navigation, a tree structure of terms, reflecting the majority of user’s assumptions of:
1. The term an item should be referred too as (example being ‘Football’ in England, ‘Soccer’ in America).
2. How terms should be grouped (example being ‘Football’ would go in the group ‘Sport’).
3. The Hierarchical order of groups of items (which level of navigation should the group go on? ‘Sport’ would typically be on the global navigation).

 
When to create a new Taxonomy
When asked to improve the usability of website or improve conversion rates. Improving the taxonomy will make finding content easier for your users.
 

These are the steps I follow to create taxonomies…
 

Finding terms:
1. Loosely structured interviews with domain experts at first, once you are sure you’re asking the right questions go on to structured interviews. Usually they are willing to talk to you for free over a coffee. I use social media to recruit them, typically Twitter. I find them through using keyword search terms, then follow them on Twitter, if they follow back I can then direct message them.
2. Competitor Analysis, record what terms they use.
3. Open card sorting with domain experts.
 

Grouping terms:
1. Closed card sorting exercise with users or domain experts. Typically I recruit 15 participants that reflect the website’s Personas. With each participant I do a closed card sorting exercise with a think aloud protocol. This allows me to understand how they expect the terms to be grouped.
2. Competitor Analysis, record how they group their terms.
 

Defining groups hierarchical order
Using notes taken from card sorting exercises I workout the average taxonomy participants have chosen. If website already exists, I also look at the analytical results and add found insights into the new proposed taxonomy. At this point we enter a negotiation period with websites editorial chiefs and heads of SEO to refine the new taxonomy.
 

Testing new navigation
Recruit participants based on personas and run usability tests with pre-written scenarios and tasks which test the robustness of the new taxonomy.