The honest truth is usually subconsciously.
I find that I often dream up stories and wake with the ideas floating in my head. The idea is never complete in full detail, that takes time. But if the thought is strong enough, it's often the kickstarter into a much bigger well-rounded story.
An example would be how I recently woke up with a idea for a story. I could envision how the story flows and ends and list all the characters needed. In this particular tale, a fox is one of two main characters needed, but I don't have the slightest idea of what the fox character should look like.
I find that I start to subconsciously doodle, sometimes on a pad, worksheet or in this case . . . sticky notes. This doesn't mean I'm half-asleep while I doodle, it simply describes the zen-like state of just letting the pencil wander without focus. I don't know what is going to appear on the paper when I'm done, but I collect the results and use that as reference to create the final image. In a way, I'm creating my own line-up of character references to pick and choose what I like and dislike.
|Subconsciously designing and feeling out a character through doodling on sticky notes|
The beginning sketches are usually very light pencilling, nothing really definite in form. Just feeling around for features that will make the character be instantly recognized as a likable fox. As time goes by, the features start to appear more defined and the pencilling gets stronger and darker. Finally, the character is slowly forming to a point that I can visualize it in my head - I quickly transfer that image to paper.
It's safe for me to say I dislike all of the rough sketch characters (seen on the left above), which causes me to continue until I finally reach the look that satisfies me. This isn't always 100% foolproof for developing characters -- it's a constant hit or miss. There are still characters I try to develop that have taken years -- AND several that still haunt me because I never reached a point of satisfaction.