Small-molecule drug discovery involves the optimization of various physicochemical properties of a ligand, particularly its binding affinity for its target receptor (or receptors). In recent years, there has been growing interest in using thermodynamic profiling of ligand-receptor interactions in order to select and optimize those ligands that might be most likely to become drug candidates with desirable physicochemical properties. The thermodynamics of binding is influenced by multiple factors, including hydrogen bonding and hydrophobic interactions, desolvation, residual mobility, dynamics and the local water structure. This article discusses key issues in understanding the effects of these factors and applying this knowledge in drug discovery.