How to create an MSI setup

No, there's no way to do that while still keeping the functionality your customers are 'implicitly' asking for. The only 'wrapping' in MSI you can do is to extract it on installation and start your InnoSetup installer from the temporary location where you extracted to. MSI is a fundamentally different way of working: InnoSetup (& NSIS & most other installers) take a code-centric approach: you 'program' the 'steps' to install your data. MSI is a database and takes a 'data-centric' approach: you indicate what files should be installed and the MSI 'runtime' does the rest. This gives you versioning and exact control of what goes where.

In short, to give your customers what they want (i.e., the ease of deployment that MSI brings with AD), you'll need 'proper' MSI's. Good luck with that, it's a major pain IMHO. But it does give good results once you master MSI & WiX.

When you change the Version property in your Setup project, Visual Studio should prompt you to also change the ProductCode. You must do this. Then, you must also set the RemovePreviousVersion property to true. Make sure the UpgradeCode stays the same.

This is probably the easiest way and, from reading your question, what you are looking for. Note that this is more of an uninstall, then reinstall, than an "upgrade" per se.