Virtualenv is a powerful tool in Python that allows developers to create isolated environments for their projects. This isolation is crucial when different applications require different versions of libraries or packages, preventing conflicts and ensuring that each project runs smoothly. By using virtualenv, developers can manage dependencies effectively, test new software versions, and maintain clean project structures. It simplifies the process of setting up a development environment, making it easier to work on multiple projects simultaneously without interference. Overall, virtualenv enhances productivity and organization in Python programming.