Virtualenv is a powerful tool in Python that allows developers to create isolated environments for their projects. This isolation is crucial when different projects require different versions of libraries or dependencies, preventing conflicts and ensuring that each project runs smoothly. By using virtualenv, developers can install packages specific to a project without affecting the global Python installation. This makes it easier to manage dependencies and maintain clean project structures. Additionally, virtualenv simplifies testing and development, as it provides a sandboxed environment where new packages or versions can be tried without risk to other projects or the system itself.