iis 6 - IIS SMTP: 550 5.7.1 Unable to relay

I am trying to configure IIS 6 SMTP server for outbound mail. I did the following telnet test from Wikipedia and getting error highlighted in bold below.

220 smtp.example.com Microsoft ESMTP MAIL Service, Version: 6.0.. ready at
Me: HELO smtp.example.com
Telnet: 250 Hello smtp.example.com [127.0.0.1]
Me: MAIL FROM: bob@example.org
Telnet: 250 2.1.0 bo@example.org....Sender Ok
Me: RCPT TO: alice@gmail.com
Telnet: 550 5.7.1 Unable to relay for alice@gmail.com

I am using the default SMTP Virtual Server configuration.
Do i need to make any configuration changes to resolve this error?

Thanks for reading!

UPDATE:
THe issue got fixed by using the IP address of the machine, not the localhost or 127.0.0.1
Thanks everyone for your replies.

Answer

If you're going to be sending email directly from the IIS SMTP server, then you don't need to configure any relay settings. The server sending outbound email from itself is not a relay. The tests you're running are exactly what you should expect when trying to send email through the server from another host (because relaying is not enabled). IIS SMTP is a fully functional SMTP server, and as such, requires no relay configuration unless other hosts will be sending email through it to external domains (domains not native to the IIS SMTP server). Again, if the IIS SMTP server will be sending email from itself to external domains, no relay configuration is required.