Toyota is in the midst of its worst downturn since the company was founded in 1937—but it’s raising the price of the 2010 Toyota Prius by about $400. This apparent contradiction appears to be part of Toyota’s core turnaround strategy: pump up the volume on marketing, and lead with the Prius.

The base MSRP of the new third-generation Toyota Prius will now range from $22,400 to $27,670, depending on the trim package. The change will take effect in late October.

Despite the downturn in its sales and the slightly higher price, Toyota is showing little concern about selling Priuses. In fact, the company had only 4 days of supply of Priuses in mid-September.

The supply might get even thinner, as Toyota plans to spend $1 billion on marketing in the fourth quarter of 2009. That’s about 40 percent more than the automaker would typically spend in the quarter. The campaign will include funding for more advertising and incentives, while granting higher profit margins to dealers. Toyota executives unveiled the plan at a meeting with its dealers earlier this month in Las Vegas. “We see the economy is starting to strengthen a bit,” said Irv Miller, group vice president for Toyota’s US sales unit. “We’ve stopped playing defense. It’s time to go on the offense.”

A Family of Priuses

By the time its turnaround takes hold, Toyota plans to add one or two variants to its Prius line-up, Miller said. He declined to give a timetable. For about two years, Toyota has hinted at the idea of a family of Prius vehicles, ranging in size from compact to a wagon or small sports utility. The Las Vegas meeting was the first time the idea has been openly discussed in front of dealers and top Toyota brass.

“The Highlander hybrid and Camry hybrid do OK, but calling it ‘Synergy Drive’ never resonated with consumers,” said Fla.-based dealer Earl Stewart, who attended the meeting. “But they can make hay on the Prius name. It’s a magic name. If somebody says ‘I drive a Prius,’ everybody knows what he means,” Steward told Automotive News. Stewart said the Prius vehicles will not be a separate sub-brand like Scion.

In addition, Toyota plans to begin commercial production of plug-in hybrids in 2012, producing between 20,000 and 30,000 units in the first year, according to Nikkei, the Japanese business daily. Toyota hopes to sell its plug-in hybrid for about $48,000. Later this year, Toyota will expand its evaluation of plug-in hybrids by leasing approximately 500 plug-in versions of its third-generation Prius. The leases will go to government agencies and corporations in Japan, the United States, and throughout Europe.

Expanding the Prius brand beyond one vehicle will also help fight competitors, which have taken direct aim at Toyota’s lead in hybrids. The Ford Fusion Hybrid was marketed as a better more fuel-efficient alternative to the Toyota Camry Hybrid. And with the Honda Insight and other future small hybrids, Honda is aiming for greater hybrid affordability. At the same time, a long list of established car companies—as well as a growing number of start-ups and Chinese manufacturers—have announced plans for plug-in hybrids and electric cars. Last week, the Chinese battery and automaker BYD. said it planned to overtake Toyota as the world’s largest automaker in about 15 years, using hybrids and other plug-in cars as a key strategy.