Change the Product Version every time the product itself changes. I suppose the best option is to bind it to an assembly version (which should be auto-incremented as well), but of course you could also just change it manually. This step is not strictly required if you use the AllowSameVersionUpgrades attribute in point 4, but I'd venture to say that keeping your product version constant is bad practise in any case.
Add the MajorUpgrade element (from Wix 3.5.1315.0). To circumnavigate the catch that the MajorUpgrade will disregard changes in the revision number of the product version, add the AllowSameVersionUpgrades (or if you prefer AllowDowngrades) attribute. This way, you will be able to upgrade from e.g. 1.0.0.7 to 1.0.0.8. and not just from 1.0.7.0 to 1.0.8.0. If you don't do this, you may see multiple installations in Programs and Features.
<MajorUpgrade AllowSameVersionUpgrades="yes" DowngradeErrorMessage="A newer version of [ProductName] is already installed." />
Here's my whole .wix file (relevant parts, the two fragments that lead to the assembly which is used for product binding are mostly optional and for illustration, any way you can get a hold of the assembly will work):